After a record number of deals completed in 2021, insurance broker mergers and acquisitions fell 42% to 369 in the first nine months of this year, according to a Reagan Consulting report released Monday.
Highly leveraged buyers have reduced their M&A activity as interest rates continue to rise, but the decline was largely due to record activity last year, when 977 deals were completed, the Atlanta-based M&A consultancy said.
Private equity-backed brokers continued to account for more than half of reported M&A transactions in the first three quarters of the year.
As the cost of debt rises with each rise in interest rates, the share of acquisitions closed by private equity may decline, the report said.
“Public brokers, privately held minority-owned companies and low-end private equity-backed brokers are well positioned to capture market share,”; Reagan said.
Rates rose to 3.08% on November 14 from 0.08% at the end of 2021.
Despite economic headwinds, rising inflation and interest rates, valuations of privately held brokerages remain at record levels due to strong buyer demand, according to the report.
The average M&A brokerage valuation in the second quarter was 12.5 times EBITDA for a well-run brokerage with $3-5 million in revenue, with an additional three times EBITDA available through an earnout based on future performance .
Agents and brokers posted organic growth of 9.5% in the third quarter – the second highest reported growth rate since the survey was launched in 2008 but down 70 points from the second quarter.
Commercial lines posted their highest third-quarter organic rate ever at 11.8%, twice the rate of personal lines and group benefits, Reagan said.