Six Trends to Watch in Brokerage M&A

As the economy continues to show signs of life—evidenced by the Federal Reserve’s announcement to hold interest rates after a “strong third quarter”—what does next year look like for merger and acquisition activity?

While we can’t predict the future, there may be some indicators that are pointing toward continued, and maybe even accelerated, consolidation in this industry for 2024 and beyond.

Here are six emerging trends that could propel the industry into an 18- to 24-month period that would be very similar to the environment in late 2020 through the record-breaking run-up of M&A deals in 2021.

1. Private equity (PE) pumping in more capital: Private equity continues to play a huge part in the consolidation of the insurance industry. This is a trend that has been building for several years, as private equity has seen exceptional returns in this industry. Right now, there may be eight to 10 PE-backed brokerages looking for a new partner. Expect a number of large buyers to recapitalize, restructure or combine even further in 2024.

2. Debt-friendly markets: We’re already seeing it today—debt markets are being friendlier to buyers. Even at higher interest rates, relevant to the amount of debt a buyer can borrow, leverage ratios are creeping back up to above 7x—like the good old days of 2021. Debt capacity is going up, while debt pricing will hopefully be going down at some point in 2024.

3. Sellers worried about taxes: Similar to the massive number of deals in December 2021 over concerns about possible capital gains tax changes, sellers may start to look toward the expiration of the Tax Cuts and Jobs Act (TCJA) in 2025, which could be a shock to the system. The outcome of the 2024 presidential election and how lawmakers will address possible tax increases as a result of the expired TCJA may determine how potential sellers behave over the next 18 to 24 months.

4. Economy showing signs of life: As the Federal Reserve continues to hold interest rates, with some economists suggesting the possibility of seeing a cut in 2024, there is a positive vibe heading into the new year. Interest rates may never return to pre-pandemic levels, but anything resembling a trend toward normalized historical levels may spur economic growth.

5. Expansion in other geographies: U.S.-based buyers are becoming more aggressive in seeking opportunities for expansion into Canada and Western and Central Europe. Buyers are looking to continue to scale and stay competitive in what is becoming a global market. While there is still plenty of supply in the United States, international expansion is becoming more popular.

6. Consolidation across different industries: The trend of insurance brokerages expanding into other categories, such as employee benefits, HR consulting, retirement and wealth management services, continues. Brokerages are trying to create an ecosystem of service offerings that’s a mile wide but at the same time building expertise that’s similarly deep. So there continues to be a convergence of demand for expertise in multiple areas. Look for it to continue in 2024.

As 2023 winds down, there is no urgency driving transactions to close by year-end. But don’t be surprised by any big deal announcements in the coming weeks and months—as lots of conversations are already taking place.

M&A Market Update

Through Oct. 31, 2023, there have been 543 announced insurance brokerage M&A transactions in the United States.

Private-capital backed buyers have accounted for 385 of the 543 transactions (70.9%) through October, which is a 1 percentage point increase from the proportion of announced transactions at this time in 2022. Total deals by these buyers has increased at a compound annual growth rate (CAGR) of 11.1% since 2018, with a marked increase after the onset of the pandemic.

Through October, independent agencies as buyers accounted for 82 transactions (or 15.1%), down from 17.2% in 2022. Banks and thrifts as buyers accounted for nine announced deals (or 1.7%), down from 2% in 2022.

Deal activity from the marketplace’s most active acquirers has remained strong in 2023. Ten buyers account for 47.5% of all announced transactions, while the top four (BroadStreet Partners, Inszone Insurance Services, Hub International, and Accession Risk Management Group) account for 25.2% of the 543 total transactions.