What "hasn't missed a beat" among insurance distributors?

What "hasn't missed a beat" among insurance distributors? | Insurance Business America

What "hasn't missed a beat" among insurance distributors?

When the COVID-19 pandemic first landed in North America, insurance dealmakers slammed on their brakes. There was an immediate halt in mergers and acquisitions (M&A) because buyers and sellers simply didn’t know what they were up against or how the pandemic would impact the economy.

But the slump did not last for long. M&A deal activity among insurance distribution firms – including retail brokers, wholesale brokers, managing general agents (MGAs) and reinsurance brokers – picked up dramatically from June 2020 onwards, and, since then, the market “hasn’t missed a beat” and the number of transactions continues to climb, according to Steve Webersen, managing director of insurance research at Conning.

When it comes evaluating the state of the distribution dealmaking market, the number of transactions completed is often a better indicator than the transaction values, because so many deals are announced without disclosing pricing, terms, and conditions.

2021 was a record year for M&A transactions in the insurance distribution space. There are multiple factors driving deal activity, and the Conning Insurance Research team expects these factors to remain in the foreseeable future.

“There’s a lot of interest among private equity firms that are buying platforms, and there’s also a lot of brokers that are controlled by private equity firms, who are continuing this strategy of pursuing additional acquisitions,” said Webersen. “They’ve been quite aggressive, and that’s accounting for a majority of the transaction activity among the top brokers.

“If you look at how the brokers are doing, they’re doing quite well in this rising rate environment. Premiums are up, their revenues and commissions are up, and they’re doing very well financially. So, the valuations are still relatively high and attractive. That means there are willing sellers, and you’ve still got good conditions for buyers. They’re willing to pay up for these firms and figure out how to grow them and make them more efficient.”

Read next: Global M&A off to a strong start in 2022

One major driver of M&A activity among distribution firms is the changing demographic. Not dissimilar to other industries, the insurance distribution space is experiencing mass baby boomer retirement. A lot of agency principals are reaching the end of their careers, and if they do not have a succession plan, it’s a natural time for them to consider selling their businesses.

“Another big driver is that there are benefits to scale and getting bigger,” Webersen added. “There are benefits both in terms of efficiencies, but also, the bigger some of these brokers get, the more potential leverage they have to negotiate better commission terms and profit share terms with their insurance carrier partners.”

Read more: What’s driving M&A transaction trends in the P&C sector?

Looking ahead, Webersen does not expect the factors driving insurance distribution M&A to fall away in 2022. He predicted that private equity firms will continue to invest in the distribution space because “that’s where they’ve been really prominent over the last couple of years, and the market conditions haven’t changed at all”.

One factor that could influence distribution dealmaking is inflation. Webersen explained: “With the direction of interest rates, and maybe where they’re being driven by inflation, that will have an impact on financing terms.

“That will be more relevant for maybe private equity buyers, especially in the distribution space, where they’re relying on debt financing for a significant part of the funding per transaction. So that might impact the appetite and valuations for some of the private equity firms if they’re willing to pay an increase in financing cost.”