Is M&A Volume in the Insurance Distribution Sector Expected to Continue?

2017 proved to be another strong year for M&A activity in the insurance distribution space, continuing the strong momentum that has been building in the market since the recession. With over 500 announced transactions, it was a record setting year in terms of deal volume. Aggregate deal value, however, declined by 26 percent from the previous year ($5.4 billion in 2017 vs $7.3 billion in 2016), suggesting a greater degree of consolidation among small to middle market distributors.

Although 2017 had a weak start, partially due to increased uncertainty about the direction of regulatory change following the 2016 presidential election and global geopolitical unrest, the M&A landscape quickly rebounded as investor confidence grew. The high deal volume was driven by a number of macroeconomic and industry specific factors.

• Interest rates remained low and the low cost of capital has encouraged borrowing and expansion via acquisitions.
• With organic growth continuing to remain elusive, M&A represented the most viable way for many larger insurance distributors to grow.
• Additional forms of capital entered into the U.S. insurance market from various sources including private equity firms, family offices, wealth funds, pension funds, and newly created closed-block (run-off) specialists.  The excess capital created a robust demand for deals albeit at higher valuations.
• Increased expectations for a tax reform strengthened momentum in the economy and investors adopted a more bullish approach.

We expect the strong momentum from 2017 to continue in 2018; and first quarter confirms this expectation. In fact, 2018 overall is projected to boast even bigger numbers, in terms of both deal volume and aggregate deal value, driven partly by a robust macroeconomic landscape in the global arena and by a number of developments in the U.S. economy and the insurance distribution industry, specifically:

• Organic growth is plateauing and markets remain soft: As the P&C insurance market remains soft (with a few specific industry exceptions), companies are looking at other ways to increase top line and M&A remains the most efficient and viable way to grow. A soft market is also often one of the most attractive times for financial sponsors to invest in the space.
• Opportunity to specialize: Brokers are looking to acquire managing general agencies and program businesses in order to scale operations and expand their practice into areas of the industry that would otherwise require too much time and capital to develop in-house.
• Diverse mix of buyers: There has been a marked increase in the types of buyers investing in the distribution space. Besides the usual suspects of Top 20 brokerage consolidators, private equity buyers and other financial sponsors, a number of new strategic buyers, ranging from carriers to other distributors, are active participants as they seek to expand operations and augment their product offerings by adding additional lines of business in an efficient manner.
• InsurTech is gaining traction throughout the industry: According to a recent Deloitte survey of over 1,000 industry executives, acquiring technology assets now ranks first as a strategic driver of M&A deals. The need to innovate—especially from a digital perspective—continues to fuel companies’ interest in gaining access to InsurTech capabilities, increasing operational efficiencies and enhancing ROE.

Moreover, the recent tax reform and the steady increase in interest rates signal a favorable economic scenario, which has increased investor confidence and contributed to a strong bull market. Whether we are headed into a hardening market soon remains an open question; however, the current trend of high valuations and robust M&A activity continues and represents an opportune window for insurance distributors to take advantage of market condition, convert some equity to cash and partner with a fast growing enterprise.

For a more in-depth discussion on market conditions, valuation multiples, transaction structure, buyer profiles or acquisition planning please reach out to one of the TAG Financial Institutions Group professionals. 

April 2018
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