June 2024 | Point of View

Mid-market brokers and intermediaries will continue to drive insurance M&A

Investors are attracted to the insurance sector's steady cash flow and 'recession insulation'

Mid-market brokers and intermediaries will continue to drive insurance M&A

Along with deal-making across a number of industries, merger and acquisition deal volume in the insurance space slowed over the past several years. According to S&P Global Market Intelligence data, the number of private equity and venture capital deals, in particular, dropped 28% in 2023, as investors grappled with high interest rates. However, over one-half of the total 2023 deal value for PE-backed insurance transactions involved brokers. 

Private equity and strategic investors will continue targeting this market, given several favorable characteristics. Insurance product demand has remained strong despite economic turbulence, and financial investors are attracted to the sector's steady cash flow and "recession insulation."

Meanwhile, an abundance of brokerages and MGAs in the United States, many with specialized expertise, makes this a segment ripe for both private equity and strategic investors looking to diversify and drive new revenue growth by:

  • Extending into new geographic areas. 
  • Establishing footholds in new business line. For example, in construction, real estate, or directors and officers/general liability lines. 
  • Adding or building upon capabilities. For example, lifting out actuarial teams from carriers to add skills or knowledge. 

Given this heightened activity, this is what we're seeing: 

Roll-ups remain prevalent: A trend toward private equity-sponsored brokerage and MGA roll-ups, or acquisitions of multiple smaller companies and merging them into one organization, emerged about five years ago and has accelerated recently. Once smaller and regional brokers become big enough to gain attention, their path often leads one of two ways: Acquisition and integration into another firm, or private equity backing that allows them to become a buyer. As these organizations grow in size, they become better positioned to negotiate with carriers more effectively based on volume and customize their products to meet market needs — both strategic advantages that drive the growth and financial value investors are looking for. 

MGAs have been a particularly attractive target for investors. These businesses typically specialize in a niche area (e.g., specialty fire coverage or fleet insurance for a large delivery organization) that requires depth. MGAs are known for creating value through underwriting excellence and their specific views of risk and risk profitability. 

Mature data and technology capabilities are a benefit: One favorable characteristic of this segment is its data acumen and capabilities. As the sales arm for the industry, brokers, wholesalers and MGAs are data-rich organizations with access to customer relationship data as well as carrier, market and exposure data. These organizations also tend to have more mature capabilities and technology for using that data to drive actuarial excellence, increase share of wallet and create financial value. 

Similarly, brokers are capitalizing on several years of accelerated investment in technology and digital capabilities to differentiate their services and make it easier for customers to do business with them. This drive toward technology-enabled differentiation has also led to increased M&A activity in the insurtech space. 

Mobilizing to realize investment goals: Value creation opportunities are out there, but multiples in this sector remain high. Delivering on value potential requires sound analysis and preparation. 

Diligence should be applied to areas such as the target's cybersecurity practices, current technology and data capabilities, and plans for using predictive analytics as well as overall fit within an aggregated organization. Investors also need to ensure they are making the right moves early in the hold period to enable growth. Key decisions for broker/wholesaler/MGA rollups or integrations will involve whether and when to centralize operations on a single platform, and if so, whether the existing platform or a new one is right for the combined business. This is an effort that requires significant effort and change and the approach taken will have a significant bearing on meeting investment goals. 

Finally, investors should keep a close eye on regulatory developments. This includes the Department of Labor's proposed fiduciary legislation, and how that may impact investments in the insurance space. While deal-making was down across industries throughout last year, there is plenty of evidence to suggest that it's heating up within the insurance space, with big deals recently being finalized and more to come throughout the rest of 2024 and beyond. 

This originally appeared in PropertyCasualty360.

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