On February 1, the Federal Reserve (Fed) made its first federal funds rate hike of the year (and eighth since March 2022) with a 0.25% increase, bringing the target range to 4.5%-4.75%, the highest since October 2007. And despite signs that the interest rate increases are starting to help ease the rate of inflation, Fed chairman Powell took a hawkish stance stating that there still may be a need for “ongoing increases in the target range” and should remain elevated throughout 2023. All in an effort to try and slow down the economy and lower inflation.1
However, Wall Street either didn’t believe it or didn’t care as the S&P 500 jumped 2.5% in the two days following the Fed rate hike announcement, and up 8.7% since 1/1/23.2
A few days later, the January U.S. jobs report came out announcing 517,000 new (nonfarm) jobs and another slight decrease in the unemployment rate, down to 3.4% – the lowest since 1969.3 This positive economic news sent the S&P 500 down 1%, as fears that job growth would give the Fed more incentive to continue raising interest rates. (Even though Fed chairman has been saying so for months.)
Throw in a better-than-expected GDP of 2.9% in December, a decline in the Consumer Price Index to the tune of 6.5%, but continued recession talks by economists who are still projecting the 2023 economy to be “sluggish” – and it’s a strange economic environment indeed.
Yet, things are still rolling along in the insurance distribution space
As January rolled past, year-end merger and acquisition (M&A) deal data for 2022 continues to roll in. The current count shows that 2022 delivered a total of 748 insurance brokerage transactions and became the second highest year on record.4 This total deal count represents a 18.9% decrease from 2021, but a Compound Annual Growth Rate (CAGR) of 6.6% since 2018.
For 2022, private capital-backed buyers accounted for 552 of the 748 transactions (73.7%), as they continued expanding their presence in the marketplace. Total deals by these buyers have increased at a CAGR of 12.5% since 2018.
Independent agencies accounted for 97 deals (13.0%) of the total deal count. This portion of the total announced transactions is consistent with 2021, yet an overall decline since prior years. From 2015-2020, Independent firms completed 23.2% of deals on average.
The top three most active U.S. buyers in 2022 were Acrisure LLC, Hub International Limited, and Peter C. Foy & Associates Insurance Services, Inc. Their combined transactions (144) represented 19.2% of the 748 total transactions. The top 10 most active buyers completed 365 of the 748 announced transactions (48.7% of total).
2023 M&A outlook
2023 has gotten off to a slow M&A start – similar to the previous two years. There have been 30 total announced transactions in January, which is on pace with the number of deals at this time last year. As the year progresses, it is anticipated that there will be a substantial number of deals that are announced retroactively.
However, coming off a year like 2022, which saw the insurance brokerage industry overcome economic challenges and still deliver a strong year for growth and dealmaking – 2023 has an optimistic feel. The large public brokers are all projecting premium increases and high single- to double-digit organic growth in 2023. Arthur J. Gallagher & Co’s CEO, Pat Gallagher stated during the firm’s Q4 2022 earnings call that “the full year 2023 organic [growth] should be pushing 10% and adjusted EBITDAC margins should be around 19%.”5
While there are still some buyers sitting on the sidelines, for various reasons, including the rising cost of debt, there are still plenty of well capitalized buyers who are very active in the M&A market. The only difference is they are going to be slightly more selective in their targets and how they view valuations.
We remain cautiously optimistic but believe it’s going to be another strong M&A year, with plenty of demand from plenty of buyers, despite the specter of a possible recession and continued economic challenges.
If you have questions about Today’s ViewPoint or would like to learn more about M&A activity for insurance agents and brokers, please email or call Phil Trem, President – Financial Advisory, at 440.392.6547.
Investment banking services offered through MarshBerry Capital, LLC, Member FINRA and SIPC, and an affiliate of Marsh, Berry & Co., LLC. 28601 Chagrin Blvd., Suite 400, Woodmere, Ohio 44122 (440.354.3230)