Anyone’s Guess

On Feb. 1, the Federal Reserve made its first federal funds rate hike of the year (and eighth since March 2022) with a 0.25% increase, bringing the target range to 4.5%-4.75%, the highest since October 2007.

And despite signs that the interest rate increases are starting to help ease the rate of inflation, Fed chairman Jay Powell took a hawkish stance, stating that there still may be a need for “ongoing increases in the target range” and interest rates should remain elevated throughout 2023—all in an effort to try to slow down the economy and lower inflation.

However, Wall Street either didn’t believe it or didn’t care, as the S&P 500 jumped 2.5% in the two days following the Fed rate hike announcement and is up 8.7% since Jan. 1.

A few days later, the January U.S. jobs report came out announcing 517,000 new (nonfarm) jobs and another slight decrease in the unemployment rate, down to 3.4%, the lowest since 1969. This positive economic news sent the S&P 500 down 1% on fears that job growth would give the Fed more incentive to continue raising interest rates.

Throw in a better-than-expected GDP of 2.9% in December, a decline in the Consumer Price Index to the tune of 6.5%, but continued recession talks by economists who are still projecting the 2023 economy to be “sluggish,” and it’s a strange economic environment indeed.

Yet things are still rolling along in the insurance distribution space.

As January coasted by, year-end merger and acquisition deal data for 2022 continued to come in. The current count shows that 2022 delivered a total of 748 insurance brokerage transactions and became the second-highest year on record. This total deal count represents an 18.9% decrease from 2021 but a compound annual growth rate (CAGR) of 6.6% since 2018.

For 2022, private-capital backed buyers accounted for 552 of the 748 transactions (73.7%), as they continued expanding their presence in the marketplace. Total deals by these buyers have increased at a CAGR of 12.5% since 2018.

Independent agencies accounted for 97 deals (13.0%) of the total deal count. This portion of the total announced transactions is consistent with 2021 yet an overall decline since prior years. From 2015 to 2020, independent firms completed 23.2% of deals on average.

The top three most active U.S. buyers in 2022 were Acrisure, Hub International, and Peter C. Foy & Associates Insurance Services. Their combined transactions (144) represented 19.2% of the 748 total transactions. The top 10 most active buyers completed 365 of the 748 announced transactions (48.7% of the total).

2023 M&A Outlook

2023 has gotten off to a slow M&A start—similar to the previous two years. There have been 30 total transactions announced so far for January, which is on pace with the number of deals at this time last year. As the year progresses, we anticipate that there will be a substantial number of deals that are announced retroactively.

However, coming off a year like 2022, which saw the insurance brokerage industry overcome economic challenges and still deliver a strong year for growth and dealmaking, 2023 has an optimistic feel. The large public brokerages are all projecting premium increases and high single- to double-digit organic growth in 2023. Gallagher CEO Pat Gallagher stated during the firm’s fourth-quarter 2022 earnings call that “the full-year 2023 organic [growth] should be pushing 10%, and adjusted EBITDAC margins should be around 19%.” (The C is for coronavirus.)

While there are still some buyers sitting on the sidelines for various reasons, including the rising cost of debt, there are plenty of well capitalized buyers who are very active in the M&A market. The only difference is they are going to be slightly more selective in their targets and how they view valuations.

We remain cautiously optimistic but believe it’s going to be another strong M&A year, with plenty of demand from plenty of buyers, despite the specter of a possible recession and continued economic challenges.