The persistent pace of M&A activity in 2023 will remain undaunted in the new year, and as activity hastens, the industry can expect organic growth to be challenged, one expert shared during a recent broker convention.
“I wouldn’t be surprised to see a large-scale merger or acquisition occur in 2024 that really dynamically changes the broker landscape,” Herb Cline, president of Cline & Associates said during the Insurance Brokers’ Association of Ontario’s IBAOcon’23.
The factors leading to a possible large-scale deal have been snowballing over the last couple of years as acquirers refined their M&A strategies.
In 2022, activity was marked by a rapid pace of acquisitions.
“There were low borrowing costs that were driving [activity], there was available capital coming from private equity markets that saw a great investment opportunity in an industry that showed itself to be resilient, stable, and profitable on a consistent basis,” said Cline.
“We also saw increasing revenues that were driving up valuations, in part due to a three-year-long hard market that saw prices increase on a consistent basis, year after year.”
These factors drove activity to heights not seen before.
Activity doubled from 2021 to 2022 as acquirers focused on specialty/niche, group benefits and diversification.
In Ontario, a record 48 brokerage transactions were finalized in 2022 — up 60% over the prior year — mostly led by consolidator activity, according to IBAO figures.
But as the year progressed, interest rates increased, and businesses held concerns about inflation. This slowed acquisition activity in the first quarter, if only slightly.
“But one thing that we can be sure of is the underlying activity continued,” he said, “and so in the second and third quarters of 2023, we’ve seen that activity pick up.”
Acquisition targets remained similar in 2023 to the year prior, but with one marked difference.
Slight change
“There was a slight change in the characteristics of acquisitions in 2023,” said Cline. “Yes, we had the typical acquisitions of portfolio diversification where group benefits organizations, specialty brokerages, as well as individual brokerage houses, were being purchased.
“But we also saw some larger acquisition activity; insurance companies and large national brokerages started to enter into larger transactions, where we saw multi-office, multi-city and multi-provincial brokerages being purchased.”
The industry witnessed significant merger activity this year, Cline said, and M&A pace is equal to that of the previous year, even despite high interest rates and significantly more amounts of capital needed to purchase.
“The impact is not measured solely by the number of transactions that are executed. You also need to look at the number of people, the number of clients, the number of customers that are impacted by the activity,” he said. “In that light, the activity for the M&A in 2023 is equal to that, and perhaps even more impactful, than what happened in 2022.”
Heading into the new year, the drivers of activity will remain the same, as will the targets.
“[The major focus is] the ability to adopt nimbly and integrate new technologies, creating synergies, creating a portfolio that’s diversified, and now, what we’re seeing more and more come to the top is distribution dominance,” Cline said of his 2024 M&A predictions.
And even as recessionary fears take hold, acquirers have fine-tuned their strategies. This allows their acquisitions to remain apace even despite hindrances from the economy.
Nevertheless, Cline forecasts a large-scale deal in 2024 that could change the brokerage landscape.
He sees acquisition activity growing stronger through to the end of 2024. All the while, organic growth will prove difficult.
“Over the last five to seven years, all of these acquirers have continually refined their processes for M&A and augmented their teams,” he said. “They have a substantial pipeline, and they are constantly adapting to economic and environmental situations.”
Feature image by iStock.com/sesame
