Insurance Agencies & Brokerages Landscape

Insurance brokers and agencies act as the bridge between insurance carriers and policyholders. Insurance agencies or brokerages are divided into four categories:

Captive agencies align with a single carrier, like State Farm or Prudential.
Independent managing agencies serve as intermediaries between carrier and client, with additional pricing, underwriting, and policy authority.
Independent wholesale agencies play the intermediating role between other agents and the carrier, typically handling specialty or hard-to-place markets.
Independent retail agencies serve to connect individual clients to the broader retail market, maintaining relationships with various carriers to secure optimal pricing and policies. This serves as the industry's core revenue stream.

At the core, insurance agencies are sales businesses. Their sales teams, known as producers, have compensation defined by producer contracts or agreements. Their primary revenue source is policy commissions, with property and casualty insurance contributing around 57% of total income.

Successful agency operation depends on excellent business judgment, proficient sales abilities, and astute interpersonal skills. Agency owners typically possess prerequisite industry training and credentials, along with significant capital and commendable credit.

The insurance industry is cyclical, driven by supply and demand dynamics. A 'hard market' signifies rising prices, whereas a 'soft market' represents falling prices. Business models favoring client acquisition and retention can significantly boost their prospects.

Additionally, business insurance pricing tends to be more unstable than personal insurance due to diverse factors. Larger firms typically have more bargaining power than individuals and can aggressively negotiate policies in line with budget constraints. Certain commercial insurance lines demonstrate greater volatility, and the competition for larger, high-commission accounts lessens volatility for smaller accounts.

On average, insurance firms operate from a lone location, employ seven individuals, and make roughly $1.2 million in yearly revenue. Effective marketing, especially referrals and online lead generation, is integral to their success. The firms are about 24% female-owned, 18% minority-owned, and 15% veteran-owned.

Approximately, 55% of insurance agencies are structured as S corporations, 22% as sole proprietorships, 16% as corporations, with the remaining operating as partnerships or non-profits. Property and casualty (P&C) firms make up 44% ($678 billion) of the total insurance marketplace including auto, home, workers' compensation, cyber, marine, and more. Life and health (L&H) insurance constitutes the remaining 56% ($877 billion) covering individual life and annuities, group life and annuities, and accident/health insurance.

US insurance agency and brokerage sales are forecast to grow at a compounded annual rate of 5.56% from 2019 to 2025, faster than the overall economy (GDP CAGR of 3.6%). This forecast from January 2021 relies on the Inforum interindustry economic model of the US economy, prepared by the Interindustry Economic Research Fund Inc.

The vast, disjointed nature of the insurance market and the aging ownership base are primary catalysts for consolidation. An estimated third of the 36,000 insurance agencies earn less than $150,000 in annual revenue. Conversely, agencies with revenue exceeding $10 million represent only 2% of the market.

This leaves a sizable middle range, primarily comprising small, family-owned, and closely held businesses. Of the 36,000 currently existing independent insurance agencies in the U.S, the majority are private, often family-owned entities. These firms will inevitably be part of the mass exit by retiring Baby Boomer owners.

Even with 700 deals occurring annually, a substantial pool of agencies remains available for transactions. Experts in the industry estimate that reported deals account for only 50% to 60% of actual transactions in a given year. Factors that make the insurance market appealing include:

High cash flow margins & low capital intensity: Insurance agencies require minimal capital investment compared to asset-intensive industries, and their commission/fee-driven revenues produce steady dividends and scalable distributions.
Recurring revenue stream: Insurance is often mandatory, with businesses needing liability insurance and auto insurance required by law, making it a semi-required product.
Plentiful credit: The availability of credit has benefited PE firms, family-owned offices, and others looking to deploy capital in both equity and debt deals.
Success breeds success: As large, PE-backed platforms began their consolidation plays, more participants were drawn to the market.

In the mid-1990s, a limited number of players were pursuing mergers and acquisitions (M&A) of insurance agents and brokers on a national level. However, since 2001, the insurance industry has observed a noticeable increase in deal activity, propelled primarily by the entry of private equity firms.

Previously, annual transactions typically encompassed 200 to 300 agencies. But from around 2006 to 2007, public equity firms began showing keen interest in the insurance field. This spurred an influx of funding for consolidations and rollup transactions. By 2018, private equity was responsible for 60% of all public transactions, which spanned from first-time acquisitions to recapitalizations and PE-backed consolidations.

Recently, private equity's role in insurance agency acquisitions has slightly decreased. This primarily resulted from the Federal Reserve raising interest rates numerous times over the past year, which made borrowing more expensive for private equity, consequently cooling acquisition enthusiasm.

Despite this, the overall market remains aligned with the five-year average. Independent insurance agents seeking growth, diversification, or retirement prospects have plentiful opportunities available, in spite of private equity's diminished participation.

Given that 40% of agencies are expected to change ownership in the next five years and 17% of current agents are approaching retirement, M&A activity is predicted to bounce back strongly from Q4 onwards. Valuations hold steady, and buyer demand remains substantial, especially for appealing sellers.

High valuations bode well for sellers, and increased buyer competition creates an additional advantage: agency owners now have a multitude of choices.

In the recent past, selling agencies had limited options when choosing a perpetuation partner. These options were typically large, uniform entities offering similar resources - capital, expanded market and program access, and a defined operating structure.

Currently, agency owners consider several factors beyond just top valuation when selecting potential perpetuation partners. It is beneficial for sellers to keep in mind their specific objectives when reviewing offers. Local agencies, once eclipsed by financially powerful PE firms, are now active participants, with many owners now able to prospect agencies that were considered inaccessible in the past.

In recent years, the independent agency system has undergone significant consolidation. Mergers and acquisitions have become a new normal, presenting unique opportunities and challenges for independent insurance agents seeking growth, diversification, or retirement.

Despite a slight decline in deal volume due to increased interest rates, the M&A domain in the property/casualty insurance sector in the US and Canada remains vibrant. When compared to the historic average rates, Q3 2023's 168 transactions, a 34% decrease, suggests normalization after a previous boom largely driven by private equity-backed buyers.

Over the past year, the Fed raised interest rates a total of nine times. This move nudged asset values, including insurance agencies and tech stocks, downwards. The upshot- expensive borrowing costs for private equity players, which led to a cooling off in the acquisitions game.

The H1 2023 count (359 deals) is down 24% from 2022 but still hangs tight with the previous 5-year average. With a 34% drop in transactions in Q3 2023, the market appears to be normalizing after the recent frenzy fueled by private equity buyers.

2015 Seller Trends

2015 saw a preference for P&C agencies in the M&A market, with these firms representing 57% of all transactions. This trend likely reflected the fallout from the 2008 financial downturn.

Key influences included: Increased deal activity, Retirement of baby boomer agency owners, Initial anxiety over the impact of the Affordable Care Act on the Employee Benefits sector, Buyers' familiarity with the operations of the P&C sector.

2016 Buyer Trends

Private equity-backed firms led in transactions in 2016, accounting for over half of the total transactions. Acrisure led with 50% more transactions than the next player. OneDigital acquired seven times the number of assets it did in the same period in 2015. Of note is the surge in transaction correlation among the top 15 buyers; this group accounted for 60% of total transactions in 2016, showing a rising trend from 54% in 2015 and 51% in 2014.

2015 Buyer Trends

Private equity-backed firms emerged as key players by 2015, accounting for approximately 54% of all transactions. This growth can be attributed to an abundance of private equity capital and limited profitable investments available. In such an environment, the insurance brokerage business became an attractive prospect for investors.

When comparing the average transactions completed by different buyer types in 2008 and 2015, PE-backed buyers stood out as the most active and led the top-10 list of most active buyers and individual buyers over four years.

2014 Buyer Trends

Despite the increase in M&A deals closed by PE-backed brokers, the number of firms closing deals remained steady, signifying that each firm is closing more transactions on average. In 2014, 19 PE-backed firms announced 158 transactions, translating into over eight deals per firm, an increase from fewer than four in 2008.

In 2014, 44% of transactions were conducted by private equity-backed firms, a substantial increase from 34% in 2012. Private buyers reported 113 transactions in 2014, the highest ever, while public brokers saw increased activity after a quiet 2013. Since 2011, the top 20 buyers gradually increased their share of total transactions, closing 63% of all deals in 2014, compared to 52% in 2008. Top buyers were increasingly more active, not necessarily that there were more buyers in the market.

M&A Landscape:

Insurance Agencies & Brokerages

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