Today's Viewpoint: A MarshBerry Publication

20/20 Vision

A look back at a wild year

Hindsight is always 20/20. A year ago, the insurance brokerage industry was kicking off the start of 2020 with high optimism after a record breaking 2019. Activity in the first quarter was continuing at a record setting pace and then we all ran into a metaphorical brick wall. The entire sector (and the world) had a new word as part of almost every strategic and operational conversation – COVID. After a turbulent second quarter in which the debt markets froze and very few transactions were completed, merger & acquisition (M&A) activity regained its traction and continued at the ravenous pace that was originally anticipated for 2020.

Based on preliminary year end data, there have been 676 M&A transactions announced in the United States. The current figure is far better than what was anticipated in the beginning stages of the pandemic, when deal activity all but came to a halt for a brief period of time. The reported deal count so far for 2020 indicates a 4.3% increase over 2019, which consisted of 648 announced transactions. It is worth noting that the announced 676 transactions de facto occurred in only ten months, as M&A activity was at a virtual stand-still for April and May.



Private Capital-backed buyers remain at the top of the market in terms of number of announced transactions, completing 462, or 68.3%, of all announced transactions. Independent firms accounted for 90 of the 676 (13.3%) announced deals. This independent buyer segment slipped considerably in terms of overall total deals as the year progressed. Overall, there were 162 buyers who completed a transaction in 2020 which represents a 18.2% decrease from 198 firms in 2019. This reduction is tied to independent firms who tightened their spending during the pandemic. The composition of seller’s line of business has remained consistent in 2020 with 50.3% being property & casualty focused, 32.5% multi-line and 17.2% of sellers in the employee benefits/ consulting space.



Additionally, we saw an increase in activity in the Specialty Distribution space with 120 transactions announced this year which represents 17.9% of all activity. This is the largest deal count in the Specialty space since MarshBerry began separately recording specialty deals – and represents a 25% increase in activity compared to 2019.

Acrisure, LLC, BroadStreet Partners, Inc., and World Insurance Associates, LLC, remain the top three most active buyers in 2020 based on reported deal count, contributing a combined 25.4% of the 676 deals announced so far this year. The Top 10 most active buyers completed 328 of the 676 total announced transactions (48.5% of the total).

Thinking Forward

Now what? This is a question being asked by buyers, sellers, and those who aren’t sure which category they fit in. No one could have predicted the pandemic and, while continuing to live through it, could not have imagined finishing 2020 as strong as the market did while setting a new high watermark on activity.

2021 brings a lot of potential change being driven by a new Democratic President in the White House and Democratic control of the House and Senate. Priorities are anticipated to include additional stimulus to support the somewhat sputtering economy, climate control, immigration, infrastructure, and taxes. Concerns of a single payer system are also in the conversation but that topic, at least for now, does not appear to be a top priority for the incoming Biden Administration.

While a number of tax changes are being contemplated by the Biden administration, a potential change in the federal capital gains rate could have the most significant impact on M&A activity. President-Elect Biden campaigned on a consideration to increase the current capital gains rate from 20% to 39.6%. While an increase of that magnitude is unlikely given the narrow margin the Democratic party currently holds in the Senate, it is very possible that a more moderate change could be coming. For instance, what would the impact of a 30% capital gains tax have on agencies and brokerages?



In the example above, a seller’s purchase price would have to be increased to $85.7 million (or ~13.7x vs. 12x EBITDA [Earnings Before Interest, Taxes, Depreciation & Amortization]) in order to break even after tax if a capital gains rate of 30% were to be rolled out.

What the future holds is unknown. However, M&A activity is likely to continue at the same breakneck pace seen at the end of 2020. Investors continue to flock towards the insurance distribution industry which has once again proven to be incredibly resilient during economic downturns. Additionally, sellers prepare to hedge on what would happen to their overall returns if taxes do rise in any way. Many remember the 33% increase that occurred in 2013 when the federal capital gains rate increased from 15% to 20%. They understand the impact even a small change could have on their value net of taxes and it is forcing firm leadership to make a decision to sell or invest enough to ensure their growth can drive sufficient value accretion to offset a potential for higher taxes.

If you have questions about Today’s ViewPoint, or would like to learn more about recent M&A activity in the insurance brokerage market, please email or call Phil Trem, President – Financial Advisory, at 440.392.6547.

Subscribe to MarshBerry’s Today’s ViewPoint blog for the latest news and updates and follow us on social media.

1 All transactions are announced deals involving public companies, Private Capital backed brokers, private companies, banks as well as others including Private Capital groups, underwriters, specialty lenders, etc. All targets are U.S. only. This data displays a snapshot at a particular point in time and has not necessarily been updated to reflect subsequent changes in prior years, if any. MarshBerry estimates that historically, a low percentage of transactions were publicly announced, but we believe that this has risen to over 50% today. Source: S&P Global Market Intelligence, Insurance Journal, and other publicly available sources.

Marsh, Berry & Co., Inc. and MarshBerry Capital, Inc. do not provide tax or legal advice. Tax and legal professionals should be consulted separately before making any decisions that may have tax or legal ramifications. Any references to tax implications in this presentation should not be interpreted as the provision of tax advice.

Investment banking services offered through MarshBerry Capital, Inc., Member FINRA Member SIPC and an affiliate of Marsh, Berry & Company, Inc. 28601 Chagrin Boulevard, Suite 400, Woodmere, Ohio 44122 (440.354.3230)

MarshBerry continues to be the #1 sell side advisor in the industry (as ranked by S&P Global). If you're considering selling your firm, we are the best choice to help you through the complicated process. If you don't hire MarshBerry, hire a reputable advisor that can help you navigate one of the most important business decisions you will ever make. You will be much better off having an advisor in your corner that knows the industry than trying to do this on your own.