Who Buys Brokers?

What is trending right now in the Canadian brokerage M&A marketplace? We put the question to Mike Berris, the partner and practice group leader of Smythe Advisory, which recently completed its Property & Casualty Insurance Brokerage Report 2019.

– As told to Jason Contant

The market for P&C brokerages and books of business is strong and will likely continue to be robust in the foreseeable future.

Currently, the market is being driven primarily by underwriters and private equity investors.

When it comes to P&C brokerage consolidation, underwriters have driven the latest round of price increases. Underwriters are aggressively buying and financing book acquisitions. I think they are factoring in their underwriting profits; this allows them to pay more, as the required return on investment includes underwriting profit. This has had the effect of seeing prices drift up.

How much? I don’t think it is appropriate to start giving multiples, as there is so much variance in the marketplace. But I have seen properly-priced deals that range from seven to 13 times EBITDA (earnings before interest, taxes, depreciation and amortization).

Private equity is another story. Their roll-up strategy is somewhat different. They are paying top prices, and if they can roll up 10 brokerages with, say, $5 million in revenue each, the combined $50-million brokerage will be worth more than the sum of its parts. I think this is a good strategy. In addition, they often offer a chance to roll over (or require rolling over) some equity, which potentially gives the divesting party a chance to get another payday.

While underwriters have had significant impact on the pricing of P&C books of business, it is our view that private equity investors are increasingly becoming significant players, at least as far as new transactions are concerned.