RESILIENT. It’s a term often used to describe the insurance distribution market, and one that continues to attract the hungry eyes of the investment community. Despite the COVID-19 pandemic and resulting socio-economic challenges – a global recession and strained labor market, to name two – the insurance distribution sector has remained resilient. As such, it is no surprise that merger & acquisition (M&A) activity in insurance distribution soared to record heights in 2020.
Deal activity got off to a roaring start last year. Buzzing with energy after a record year of transactions in 2019, well-capitalized acquirers (both private equity-backed and public companies) continued to build on their momentum and snap up insurance distribution firms. Many of the completed deals in January and February were negotiated and agreed back in 2019, before the global coronavirus pandemic pressed pause on the world as we knew it.
In March 2020, when the World Health Organization (WHO) declared the COVID-19 outbreak a global pandemic, the economy screeched to a halt. Credit markets froze for several weeks and insurance distribution M&A activity petered off as buyers and sellers tried to assess the potential impacts of the pandemic and figure out all aspects of their businesses and financing for potential deals.
“On the demand side, we saw many buyers hit pause at the onset of COVID-19 to digest what impact the pandemic would have on agency performance as access to capital was temporarily diminished,” said Trevor Baldwin (pictured directly below), chief executive officer, Baldwin Risk Partners. “Many buyers returned to the market over the course of 2020, and we even saw new entrants as agency performance again proved resilient amid times of economic stress, reiterating the quality and durability of the industry as a whole.”
As indicated by Baldwin, the pandemic-driven pause in deal activity did not last for long. The factors driving consolidation in the insurance distribution landscape remained as prevalent in the COVID-19 era as before. For sellers, some core motives included: a quest for scale and additional resources (especially technology), lack of internal perpetuation, and a desire to capitalize on record-high valuations.
Buyers, on the other hand, are interested in the brokerage/agency space for its resiliency, which has been proven through tough economic times like the Great Recession and the current pandemic. Insurance distributors have been able to produce predictable and consistent revenue streams coupled with high margins, making them attractive from an investment perspective.
According to MarshBerry, a firm that provides intellectual capital, strategic consulting and merger and acquisition advisory to clients within the insurance industry, the United States saw an all-time high deal count of 705 announced transactions in 2020, up from 648 announced transactions in 2019. Furthermore, there were 57 firms in 2020 that did two or more transactions, compared to 49 buyers in 2019 that did more than two deals. However, there were 202 total firms that did transactions in 2019, compared to 169 in 2020.
What does all of this mean? According to Phil Trem (pictured, top), president of MarshBerry’s Financial Advisory Division: “It likely shows fewer independent firms are buying due to continuing COVID-19 concerns. Those that were in acquisition mode leaned into the accommodating conditions of the marketplace. Fewer firms tried their hand at acquiring while established buyers took full advantage of a hyperactive market.”
Deal valuations also reached record highs in 2020, exceeding what were all-time highs at the end of 2019. Trem commented: “In the fourth quarter of 2020, valuations on top-rated platforms were approximately 10% higher than in the first quarter. So, valuations realized during the pandemic, on average, were higher than they were pre-pandemic, which is not a trend we expected. Because of the resiliency of the insurance industry (similar to its performance during the Great Recession), existing buyers renewed their acquisition appetite while new entrants, impressed with this resiliency, added to an imbalance of buyer appetite. With more buyers in the space, and heightened demand, valuations were inevitably driven higher.”
It is uncertain how long this valuation trend will last, given the potential for capital gains tax hikes under the Biden Administration, but at the onset of 2021, deal activity in the United States has held steady with the frenzied finish of 2020.
Timothy Hall (pictured directly above), executive vice president and head of mergers & acquisitions at Relation Insurance, Inc., commented: “While there remains uncertainty on when COVID-19 will ‘end,’ I believe that the insurance agency acquisition ecosystem has adapted to efficiently and effectively complete transactions in an alternative environment. Even in a post-COVID world, firms will continue to use certain tools (i.e. video-conferencing) that allow for greater productivity and are more cost-effective. As indicated by the record number of transactions, deals still got done in 2020 and trends point to that continuing in 2021.”
One thing is certain, which is that investment interest in the insurance distribution market remains high despite the unprecedented times we find ourselves in. This is truly a testament to the resiliency of the market.