What P&C brokerage buyers are really looking for

Buyers of Canadian P&C brokerages are becoming more selective about the brokerages they will pursue, with an increase in demand for commercial lines-focused brokerages, a new report from advisory firm Smythe LLP says.

P&C consolidators continue to diversify their acquisitions, with a notable uptick in the number of life and group health acquisitions, claims management acqui-hires (the process of acquiring primarily to recruit employees), and other services in the vertical, Smythe LLP said in its report, M&A Frenzy Continues: Canadian Insurance Brokerage Industry Update.

“That being said, buyers are being more selective about the brokerages they will pursue, with an increase in demand for commercial lines-focused brokerages with a specialization or program business, above-average organic growth, youthful expertise (‘acqui-hire’), and specific geographic considerations,” the report said. “There is still a strong market for traditional, personal-lines focused brokerages, however there is unequal demand amongst the usual acquirers.”

M&A activity has been steadily increasing for the past decade, and 2023 is shaping up to be another record-setting year. As of the end of October, there have been 88 publicly-announced Canadian insurance brokerage transactions (including life and group health brokerages acquired by P&C acquirers), with 72 of them focused on P&C targets. “This trend represents at least a continuation of the uptick in activity in this space since 2020, with 74 publicly-announced deals in 2022 and 64 in 2021,” the report said.

The pace of M&A deals slowed in the transition from late 2022 to the first quarter of 2023, which Smythe LLP attributed to acquirers adapting to the new “higher for longer” interest rate environment.

“Since then, the number of closed deals in Q2 and Q3 of 2023 has surpassed any previous quarter since 2018,” Vancouver-based Smythe partners Alex Wong and Gagan Ahluwalia wrote in the report. “We expect the number of transactions will continue to rise as acquirer appetite remains robust, and the number of brokerage owners looking to exit their business due to retirement considerations is increasing.”

Ontario and Alberta represent the largest proportion of M&A activity in Canada. “The demand for retail brokerages in provinces with public auto insurance remains weaker, with exceptions made for brokerages with a strong commercial book of business or scale.”

Private equity-backed consolidators continue to dominate M&A activity, being responsible for 59% of acquisitions so far this year. While insurer-backed acquisition activity surged in 2022, PE-backed firms remain the driving force behind consolidation over the past decade.

Other trends observed from Smythe’s 10+ advisory transactions this year include:

• Although certain acquirers have slowed down, overall M&A activity and valuation multiples remain resilient, and in some cases have increased for brokerages represented in competitive sales processes (i.e., a bidding war), compared to those sold in a one-on-one direct process.
• EBITDA (earnings before interest, taxes, depreciation and amortization) multiples range from 10x on the low end to more than 15x on the high end, which has translated into revenue multiples exceeding 6x for highly profitable brokerages.
• Deal structure has continued to evolve, with an increased use of share consideration versus all-cash deals. Prior to the new debt environment, share consideration was primarily used for retention and management purposes. Now it’s also being used as a financing tool.
• Sellers are becoming more aware of the pros and cons of merging with the different types of acquirers, and are therefore being more thoughtful about to whom they will sell the brokerage and when to exit their brokerages.
• Internal succession plans (such as selling to employees or the next generation) have become more challenging now compared to years prior, given that valuations are unchanged even in a much higher cost-of-capital environment.

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