This time of year always seems to be a bit nostalgic. Many take stock in all that has been achieved and plan for bigger and better in the coming year. The insurance distribution industry has achieved a lot – This time of year always seems to be a bit nostalgic. Many take stock in all that has been achieved and plan for bigger and better in the coming year. The insurance distribution industry has achieved a lot – at least as it relates to the merger and acquisition marketplace (M&A market). The global pandemic and concerns over potential tax increases have driven many M&A firms to consider selling or partnering with another organization. The strong results achieved by independent M&A firms through the last 24 months have once again established the insurance distribution industry as a very strong and resilient investment. These results have driven even more interest by buyers or investors across the U.S. and internationally.
With buyers and sellers both being driven to the deal table (albeit for different reasons) a new high watermark for announced M&A transactions in the U.S. has been set. As of 12/28/21, a total of 754 merger and acquisition transactions have been announced – with a number of deals still set to close throughout this week. While the federal government failed to pass any sweeping tax legislation prior to year-end, there are still looming concerns that something can be done retroactively to the beginning of 2022. As a result, there will be a large number of deals completed this last week of December instead of January 2022.
The 2021 year-to-date deal count of 754 will likely grow closer to 800 deals (if not more) by the time the dust settles. It dwarfs the record set in 2020 of 711 announced deals. At this pace, a 10%-15% increase in total activity over 2020 is expected. This marks the fifth straight year that a new record is set for total deal count in the space – I guess records are meant to be broken right?
However, do not expect a repeat performance in 2022. The M&A market remains very active and a drop off in activity is not expected like we saw in 2013 after capital gains were formally increased on January 1, 2013. It is possible that the federal government will still pass some sort of tax legislation, but it most likely will not be large enough to keep M&A firms from continuing to transact. In fact, the underlying driver behind most firms selling is tied to a shift in the market itself. Since the pandemic, insureds are expecting more from their brokers. Insureds are demanding consultants who can provide advice and guidance – not just place insurance. This is driving firms to need tools and resources in their repertoire that are not easy to develop on their own. The M&A market is demanding more services and capabilities and independent M&A firms have to decide whether to build these capabilities themselves or align with someone else who already has done the work. This fundamental shift is not going away and will continue to be a key driver behind seller activity in the M&A space.
And private capital investors still love the brokerage space. There were a very large number of top 100 brokers either selling, taking on capital partners or recapitalizing with new capital partners throughout this calendar year. That trend is also expected to continue into 2022. Just over 74% of all M&A transactions announced this year have been completed by private capital backed brokers. Roughly 560 deals have been announced, far exceeding last year’s mark of 483 (and 400 in 2019). There are more private capital backed M&A consulting and advisory firms than at any point in the history of the industry and these organizations need to continue to aggregate and acquire growth to complement (or supplement depending on who you are referring to) their organic growth.
Another update will be sent in early January to wrap up 2021 with more firm data and a look at valuation metrics. Deal count is not the only category to hit a high water mark in 2021 – valuations have continued to climb to record levels as well.
Enjoy your New Year knowing you’ve chosen an effective insurance merger and acquisition strategy for your business!