Globally, mergers and acquisitions have slowed dramatically as many independent agents question the benefits of M&A as a growth strategy in 2023. Activity is down by a staggering 45% from Q1 of 2022 to Q1 of 2023—and a whopping 60% from Q1 of 2021 to Q1 of 2023 according to S&P Global Market Intelligence.
So, what does this mean for independent agents?
Can they simply make adjustments, and continue pursuing their M&A strategies or should they pause outright? Are there even attractive deals out there?
We believe some incredible opportunities remain for agents who consider the bigger picture.
Impact of the economic environment
The economic landscape has changed drastically over the last few years, started by the COVID-19 shutdowns, which lead to higher costs for goods, an extremely tight labor market and the world being flooded with cash, which, combined with a variety of other factors, lead to inflation. In an effort to combat this inflation, the Federal Reserve raised interest rates from near zero to north of 5%. While some believe interest rate hikes have peaked, the truth is they’re only making an educated guess at this point—which is still just a guess.
M&A activity, just like the rest of our economy, is greatly influenced (positively or negatively) by interest rate changes. Higher interest rates make transactions more expensive. The purchase of independent insurance agencies is no exception.
Nevertheless, in spite of higher interest rates and current economic uncertainty, insurance agencies are likely to remain recession-proof businesses making them attractive to buyers. As evidence, over the last 25 years, which includes three economic downturns, insurance brokerages have only experienced negative organic growth twice.
Striking a deal in 2023
As M&A activity dramatically slows, insurance agents and brokers are becoming acutely aware that the M&A market is nothing like the one they reveled in over the last 10 years. However, that does not mean there aren’t incredible opportunities to be had via M&A. Here are some steps agencies should consider to ensure they close the best deals in an effort to grow their businesses:
Strengthen your balance sheet. In these times of uncertainty, insurance agents and brokers should work to deleverage their balance sheets, preserve cash and be judicious about where they invest. If a great deal comes along, agents and brokers will want to ensure they have an adequate amount of capital to make an offer and a quality balance sheet able to absorb the higher financing cost and risk.
Be opportunistic. Unlike the last decade of cheap financing and growth at any cost, agents and brokers should be more selective about which deals they pursue. Consider cultural fit, ideal geographic region, expanded lines of business and perhaps most importantly in this environment, talent. They’ll want to outline their criteria well in advance and when the right deal comes to market, be ready to pounce. The key is to avoid being frivolous and taking on unnecessary financial risk.
Because M&A activity is impacted by a wide variety of issues including everything from geopolitical factors to the tight labor market to FOMC interest rate hikes, it is difficult if not impossible to predict exactly how long it will take the market to reverse course. Therefore, agents and brokers should continue building and positioning their agencies as resilient regardless of what part of the cycle we’re in, while also nailing down the criterion necessary to capitalize on a deal that’ll help their agency thrive.
Sean Kenny is senior vice president of corporate development for SIAA, The Agent Alliance (siaa.com).