After a record number of deals completed in 2021, insurance brokerage mergers and acquisitions fell by 42% to 369 in the first nine months of this year, according to a report by Reagan Consulting released Monday.
Highly leveraged buyers have reduced their M&A activity as interest rates continue to rise, but the decline was largely due to the record level of activity last year, when 977 deals were completed, the Atlanta-based M&A consultant said.
Private equity-backed brokers continued to account for more than half of reported M&A transactions in the first three quarters of this year.
As the cost of debt increases with every interest rate increase, the percentage of acquisitions closed by private equity could decline, the report said.
“Public brokers, privately held firms with minority capital and low-levered private equity-backed brokers are well-positioned to grab market share,” Reagan said.
Interest rates increased to 3.08% as of Nov. 14 from 0.08% at the end of 2021.
Despite economic headwinds, rising inflation and interest rates, valuations of privately held brokers are holding at all-time highs due to strong buyer demand, according to the report.
The average brokerage M&A valuation in the second quarter was 12.5 times earnings before interest, taxes, depreciation and amortization for a well-run brokerage with $3 million to $5 million in revenue, with a further three times EBITDA available through an earn out based on future performance.
Agents and brokers posted organic growth of 9.5% in the third quarter – the second-highest reported growth rate since the survey was launched in 2008 but a 70 basis-point decline from the second quarter.
Commercial lines posted its highest third quarter organic rate on record at 11.8%, double the pace of personal lines and group benefits, Reagan said.