Through the first three quarters of 2022, there have been 627 insurance agency mergers and acquisitions, a 6% decline compared with the same period the year prior, according to OPTIS Partners.
When looking at deals only involving agencies in P&C, employee benefits and TPAs spaces, the year-on-year decline was 14%. On paper, the decline might appear that the market is slumping, but OPTIS noted the deal volume seen in Q3 2022 was the second-highest recorded total for the period and is 8% above the prior five-year average.
Important to note that the same period in 2021 saw an extraordinary amount of deals. The results seen so far this year have been a “regression to the mean,” according to Steve Germundson, a partner at OPTIS Partners. Regression to the mean is the idea that if one random variable in a dataset is extreme, in this case the number of deals through Q3 2021, the next sampling (deals so far in 2022) is likely to be closer to the mean.
Following a sluggish start to M&A activities this year, Germundson predicted more robust action for the remainder of 2022. In a release detailing Q1 2022’s results, he noted that a number of buyers had reported having “double-digit numbers of letters of intent in hand” moving into Q2.
“This return to a ‘normal’ number of deals is to be expected considering the surge in deals last year along with the fact that a lot of the agency owners contemplating whether or not to sell pulled the trigger on it in the last few years. The inventory has shrunk,” Dan Menzer, partner at OPTIS, said in a release.
According to Tim Cunningham, OPTIS manager partner, the increasing cost of capital is suppressing values, but at the same time, there are a growing number of buyers propping up demand.
“The net effect is a valuation environment that is holding rather steady, though we could expect underwriting standards to tighten, and a few buyers could be finding themselves limited by high leverage,” Cunningham said in a release.
The data includes U.S. and Canadian P&C agencies selling, employee benefits agencies and those selling both. This year’s dataset was expanded to include life/financial services, consulting, and other businesses associated with insurance distribution.