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The insurance M&A market in 2024 is significantly more complex now than it was 20 years ago. This is due to a number of contributing factors:
The dominance of PE firms in the buyer space
The increased number of overall buyers, which has created a more competitive market
Increasing payout percentages of equity, which is further complicated by evolving capital structures
High agency valuations despite the cost of debt surpassing expected returns
Each of these points could (and likely will) be subjects of individual articles, as well as economic case studies for classrooms of the future. However, this report seeks to make sense of these qualities as a whole to provide an overview of the 2024 insurance M&A market.
Note: The data in this article was originally presented in a webinar detailing the state of the 2024 insurance M&A market, titled “2024 Insurance Broker M&A Update: A Robust but Complicated Market.” Included data is based on our own experience as well as data collected by our SF Index, which monitors approximately 70% of the total insurance M&A market. |
The table of contents below offers quick links for readers seeking specific information in later sections.
The History of Private Equity in Insurance
One of the primary forces differentiating the insurance M&A market in 2024 from those of decades past is the presence and dominance of private equity (PE) firms in the buyer space. As the charts below indicate, what used to make up approximately 10% of the total buyer space now takes up a whopping 75% of the market:
Private Equity in Insurance, 2007 vs. 2024
2007 (255 Deals) | 2023 (857 Deals) |
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The growth of private equity in the insurance M&A market can be attributed to equal parts reaction to it and reflection of it. PE firms rely on leveraged buyouts (LBOs) for the lion's share of their deals, which often involve using the acquired company’s assets as collateral to insure the loan used to purchase it. It used to be the case that insurance agencies and brokerages did not have the assets required for PE firms to utilize an LBO transaction, thus limiting their presence in the insurance M&A buyer space.
Brokerages and agencies have grown in size and capacity over the last two decades, however; the diversification of the insurance industry has resulted in:
Larger policy portfolios
Diverse client bases
More carriers per brokerage/agency
These developments – combined with the introduction of new technologies for streamlining operational expenses and the inherent resiliency of insurance as a necessary service – have given insurance brokerages a more reliable revenue stream. Ultimately, this paved the way for PE firms to take an increasingly larger share of the insurance M&A market starting about a decade ago.
Interest Rates, Multiples, and Agency Valuations
Historically, the conventional wisdom surrounding the relationship between interest rates and valuation multiples is that the latter has an inverse relationship with the former, meaning that when interest rates are low, valuations are high – because buyers will pay more when they don’t have to worry about interest. Conversely, when interest rates are high, valuations are supposed to decrease because buyers will try to make up what they are losing to interest.
Insurance Agency EBITDA Multiples vs. Interest Rates, H1 2020-H1 2024
The last two years, then, make an interesting case study for future economists; although interest rates have risen to the highest levels in more than two decades, we nonetheless see record valuation multiples, with the industry average resting around 11.6x for insurance agencies.
This is even more interesting when we view the rate of return for these insurance agencies, which has actually dropped below the cost of acquiring debt for a transaction, creating a negative spread for the first time in M&A history. Effectively, this means that, for the first time, buyers are purchasing insurance agencies at a loss for themselves in order to capitalize on what they see as profitable long-term investments.
PE Cost of Debt vs. RoR, H1 2020 - H2 2023
This inverse spread indicates one of the strongest seller’s markets we’ve seen in the insurance M&A market to date. The following section details why buyers are so eager to purchase insurance agencies at such high costs, and discusses some additional trends we’ve noticed in the 2024 market moving into H2.
Note: Although we present the above information in an attempt to shine a light on the valuation process for insurance M&A deals, we must stress that this is a process best left to professionals. On average, agencies and brokerages that represent themselves earn 30% less than advisor-led deals. Our team at Sica | Fletcher is exceptionally skilled at navigating the insurance M&A market and would be happy to speak with you to discuss next steps. |
2024 Insurance Broker M&A Market Overview
For the first time, M&A acquirers are purchasing insurance brokerages at a loss in favor of possible long-term gains. While there are likely many reasons acquirers would do this, our team has uncovered three of the most likely causes:
Inflation Premiums. Premiums on insurance policies have more than tripled over the last four years, from 2.5% in 2020 to 9.5% in 2023. This not only increases the revenue flow for the brokerage but also illustrates the industry’s resiliency against the economic turbulence that took place over the same period of time.
Increased Buyer Demand. The buyer pool has increased dramatically over the last two decades, from ~5 key players in 2007 to 50+ in 2023. The resiliency of the insurance M&A market has led to sustained levels of increased competition despite the rising cost of capital.
Institutional Capital Dynamics. The goal for many buyers has ultimately changed, seeking long-term value add of rolling up a smaller company to increase their market share, thus adding value to the acquiring company.
In short, insurance agencies and brokerages are becoming more profitable and resilient, the insurance M&A market is more competitive, and buyer behavior is different than it used to be. In addition to changes in these individual factors, the 2024 insurance M&A market as a whole has seen a few notable changes, which provide some much-needed context for the unusually high valuations.
Deal Volume Has Lowered
Deal volume has never quite recovered from the near-record numbers posted in 2021. Both 2022 and 2023 saw sequential declines in deal volume, dropping to a grand total of 857 by the end of Q4 2023. This suggests that while acquirers are paying more for insurance agencies, they are doing so less often.
Insurance M&A Deal Volume, 2020-2023
It should be noted that while the numbers posted in 2021 are higher than any others in the last decade, they do suffer a bit of artificial inflation, as a projected capital gains tax at the end of year thought to have pushed through several deals that might not have gone through otherwise. This means that the dip we saw in 2022, although a real trend, was not quite as severe as the graph above makes it seem.
Valuations for Smaller Agencies Have Increased
One of the more peculiar changes to the insurance M&A market has been the recent buyer prioritization of acquiring smaller brokerages and agencies, primarily those with <$1MM EBITDA. Since 2022, the average multiple for these agencies has increased from 10.7x to 11.4x.
Our experts believe that the rising valuations for smaller insurance agencies are most likely associated with the new buying habits of insurance M&A buyers in 2024. As interest rates have risen over the last two years, shifting acquisition strategies have led buyers to purchase smaller agencies in order to save money.
It’s also an important note because smaller insurance agencies are less likely to have an experienced M&A advisor on their team, which typically means their agency can be purchased for a significant discount.
Advisor-Led Earned 30% Higher Than Self-represented
Even more valuable to M&A buyers than small agencies are self-represented ones. This is because a self-represented agency is less likely to understand the nuances of insurance M&A, making them more likely to agree to a less favorable deal structure that’s presented favorably. Our studies show that self-represented agencies, on average, earn 30% less than those with an advisor on their team.
Advisor-Led vs. No Advisor Valuations, 2023
>$1MM | <$1MM |
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This creates two distinct strategies in the 2024 insurance M&A market, depending on whether you are a seller or a buyer, in order to secure a more favorable deal:
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The next section details the insurance M&A market of 2024 in further detail, and pays particular attention to ways in which the current market differs from those of decades past.
How the Landscape Has Changed
The explosion of PE firms in the insurance M&A market has changed not only the buyer space but the market as a whole. Because of the increased PE presence, the current insurance M&A market features a more extensive deal process, a shifting buyer pool, and a more complicated payout structure. The following subsections detail broader changes in the insurance M&A market that have stemmed from this change.
Growth of Stock Use
Even in just the last few years, our team has noticed a stark difference in the payout structure of insurance M&A deals. Instead of full cash payouts, which were more common 10 years ago, modern deal structures consist largely of equity in the acquiring company. We’ve seen this number jump even in the last two years, with the percentage of equity almost doubling.
Cash vs. Stock: 2022 - 2023
2022 | 2023 |
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The two main reasons for the increased use of equity are:
Macroeconomic turbulence. Especially since H2 2022, the use of equity has jumped significantly. Our team’s analysis of this trend has found that buyers are using larger percentages of equity to compensate for higher costs of purchasing agencies following rising interest rates.
Keeping sellers involved. Even prior to the 2022 recession, we still saw large amounts of equity being used to supplement cash payouts. This is because providing sellers with equity keeps them invested in the future of the company, which can ease sometimes difficult management transitions post-closing.
As a result of this overall increase in equity, the M&A deal process has grown significantly in length as advisors work out the value of said equity and negotiate the rest of the payout structure. Whereas the majority of deals used to take ~6-8 months to close, they now average ~9-12, with longer deals taking upwards of 18 months.
These delays are especially understandable, however, when you consider that equity itself is not as simple as it used to be, as the following section details.
Evolving Capital Structures
With Equity taking a larger place on Center Stage in insurance M&A transactions, a new emphasis on understanding what type of equity you’re actually getting has emerged. This determination can affect who gets paid and in what order, ultimately affecting your total payout.
It used to be the case that equity structures consisted of senior debt (i.e., high-priority debt with the largest claim on the company’s assets) and common equity (i.e., the total value of ownership held by common stockholders). This ultimately meant that sellers would get paid once the senior debt had been paid, ensuring a more reliable payout.
Capital Structures Compared: Classical vs. Advanced
Modern equity structures, on the other hand, feature varying classes and types of equity, which complicate the process of who gets paid and in what order. In the example above, for instance, the same common equity that would have been standard in deals a decade ago would now be the very last person paid out, resulting in minimal or even no payments at all, depending on the situation.
Buyer Rotation
One of the most peculiar traits of the 2024 insurance M&A market is the difficulty associated with identifying the most active buyers. In decades past, this was a relatively simple process, as the most active buyer was the same every year unless a significant market shift occurred. In this case, a new buyer would take their place for the next several years.
PE firms, however, operate with a different strategy in mind, coming into the market strong one year and holding back in years when conditions are less favorable. This behavior, combined with the relatively equal levels of funding between firms, creates a market where the most active buyer shifts annually, as indicated by the graph below:
Top M&A Buyers, 2022 vs 2023
This may not seem especially problematic on the surface, but the reality is that a constantly shifting buyer pool makes it exceptionally difficult to read market trends and make projections of what’s likely to happen next. As a result, the 2024 insurance M&A market feels exceptionally unstable, especially to insurance agencies that are representing themselves.
Note: The ability to effectively read the insurance M&A market is one of the most important skills that an M&A advisory firm brings to the table. It is through these market valuations that they are able to negotiate with buyers and earn sellers 30% more on average than in self-represented deals. If you are considering selling your insurance agency, speak with our team to determine your best course of action moving forward. |
Opportunities for Buyers and Sellers
So, now that we’ve provided an in-depth breakdown of the 2024 insurance M&A market, we want to take a second to identify some insights into what buyers and sellers can do to succeed. Before we do, here’s a quick and dirty summary of our breakdown so far:
Insurance M&A Market: 2024 Summary
Good | Neutral (but Important) | Bad |
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This creates a market in which buyers and sellers are following very different M&A strategies. The following subsections detail those strategies as well as actionable insights and suggestions on what to do in the coming year(s).
Buyers: Buy Cheap, Buy Small, & Wait
Buyers in 2024 face two central challenges:
Valuations are at an all-time high
The buyer pool is larger and more competitive
When combined, these two factors essentially create an insurance M&A market in which buyers are forced to bid higher to acquire insurance agencies, both in order to meet the high valuation standards of the current market and to outbid the other 50+ buyers in the pool.
Our team has identified two strategies commonly used by buyers to compensate for these challenges. On average, buyers are buying small agencies, or they are buying self-represented agencies in order to capitalize on a smaller expected payout. Here’s how both of these strategies break down:
M&A Acquisition Strategies, 2024
Strategy | Buy Small Agencies | Buy Self-Represented Agencies |
Justification | Smaller agencies sell for smaller multiples, allowing buyers to pick up agencies for less than they would pay for a larger one | Self-represented agencies are more likely to agree to less favorable deal structures due to either impatience with or ignorance of the M&A deal process |
Average Multiple | ~9.2x | ~7.4x |
Average Savings | ~18% | ~30% |
Expected Return | 19.6% | 22% |
Overall | Good | Better |
A third option, one which buyers seem to be selectively embracing over the last two years, is to simply wait and see. This is especially relevant while interest rates have risen, and deal volume has experienced some decline, indicating that many buyers are willing to wait out this period of macroeconomic turbulence and continue business when conditions are more favorable.
Sellers: Know Your Agency
Knowing what you now know about the habits of most M&A buyers, the best course of action is clear: make your agency more profitable by diversifying your policy portfolio and carrier relations, hire an advisor to secure the best multiple, and prepare for an extensive deal process.
Beyond these general points, however, our team has two notes to provide sellers:
Know Your Brokerage.
Multiple of What?
To start, consider how your brokerage will look post-closing. What is the growth potential of the brokerage? Who, if anyone, will remain on staff (particularly management) post-closing? Considering what your agency will be after closing rather than what it is right now will help you set expectations for the deal process once it has begun.
Following a similar pattern, we have noticed that sellers often become so obsessed with the multiple itself that they fail to consider what the multiple is of. The phrase “12x0=0” comes to mind; just because your agency is getting a 13x multiple doesn’t mean the payout will be good if the valuation model is not in your favor. Consider both your EBITDA as well as your EBITDA margin (i.e., operating profit as a percentage of total revenue) when performing your valuation.
“Multiple of What” Explained
Buyer A | Buyer B | |
Revenue | $5MM | $5MM |
EBITDA | $1MM | $2MM |
Margin | 20% | 40% |
Multiple | 10x | 10x |
Purchase Price | $10MM | $20MM |
Buyer B in the table above earns a higher payout since they have double the operational profits of buyer A, despite having the same revenue and the same multiple. In fact, using this model, buyer A could have a 19x multiple and still not earn a higher payout than buyer B at just 10x (currently below the industry average of 11.6x, for reference).
The thing to remember regarding our question, “multiple of what?” is that, ultimately, sellers control the calculation of the EBITDA during the initial valuation. In addition, agencies and brokerages have the current advantage of a highly competitive market where they can be pickier about offers and apply pressure for a more favorable deal where appropriate.
Our Outlook on the 2024 Insurance M&A Market
So far, Q1 2024 is holding to our team's expectations, with fairly active insurance M&A deals compared to levels the same time last year. Just looking at the deals that Sica | Fletcher has managed directly, we are seeing modest improvements over Q1 2023:
Q1 2024 Sica | Fletcher Deal Statistics
Keep in mind that all these improvements are occurring despite the extended delay in officially lowered interest rates. The Federal Reserve’s projected cut in H2 2024 remains likely, especially considering the associated positive press that comes with an election year. This, plus more favorable economic conditions in 2024, means that the short-term rate is very likely to decrease.
We also know that many buyers are waiting in the wings for this to happen. As it currently stands, PE firms are estimated to have as much as $2.5T in dry powder, with some estimates as high as $4T. This means that H2 2024 is likely to see a flurry of M&A activity – if and when interest rates lower and buyers feel more confident in the insurance M&A market.
Dry Powder Estimates in Private Equity, 2020-2024
A final possibility, noted by Sica | Fletcher Directing Manager Michael Fletcher, is the possibility of “yield curve control” - the practice of governmental control over - in order to compensate for the negative spread between the cost of acquiring debt and the expected rate of return. This has not been officially discussed by any government body, however, if enacted, it will be the first time the government has done so since WWII.
Next Steps
We’ve mentioned this a few times already, but the smartest thing you can do if you are an insurance agency owner considering selling your company is speak with an M&A advisor, ideally one experienced in the world of insurance M&A. Sica | Fletcher is the most experienced firm in this space, and our team can provide a summary analysis of what you should expect moving into a deal process, as well as connect you to the best buyer for your agency. Reach out to discuss the next steps at our contact page or use the contact information below.
About Sica | Fletcher: Sica | Fletcher is a strategic and financial advisory firm focused exclusively on the insurance industry. Founders Michael Fletcher and Al Sica are two of the industry's leading dealmakers who have advised on over $16 billion in insurance agency and brokerage transactions since 2014. According to S&P Global, Sica | Fletcher ranked as the #1 advisor to the insurance industry for 2017-2023 YTD in terms of total deals advised on. Learn more at SicaFletcher.com.
Contact: Mike Fletcher
Managing Partner, Sica | Fletcher