2021 – ROUNDING THE STRETCH

Updated: Sep 28

AN UPDATE AND PREDICTION FOR INSURANCE BROKERAGE M&A


It’s hard to believe that 2021 is starting to wind down, and as the old curse goes - we appear to be living in interesting times. Just a few of this year’s highlights (not that you need reminding) include a pandemic that stubbornly refuses to go away; fires, hurricanes and floods of near biblical proportions; a nation deeply divided across political, ideological, cultural and ethnic lines; economic riches for some and devastation for others; international threats and the development of unconventional warfare; and domestic political turmoil and uncertainty.


For you, as insurance agency owners and others interested in the insurance brokerage business, we thought it would be helpful to provide an update on insurance brokerage M&A and describe what we currently are experiencing, and what we anticipate for 2022. As the advisory firm that executes the largest number of mergers and acquisitions transactions for insurance agents and brokers, and with our deep experience and contacts with the private equity community, we have a better vantage point on what is going on than most others. Looking into a crystal ball and trying to predict what we anticipate for 2022 is dangerous business for anyone, particularly given all of the uncertainty we currently face, but here it goes.


Year End Wave of Transactions

  • For Sica Fletcher, 2021 has been an incredibly busy year- fueled by (i) continued high demand for attractive acquisition candidates as private equity sponsored brokerages have dominated the acquisition market, (ii) resultant peak multiples and (iii) sellers’ concerns related to potential tax increases proposed by the Biden administration. We have detailed these trends in numerous white papers and blogs.

  • In fact, multiples have increased this year even further from what we thought were peak multiples last year.

  • We are currently experiencing a wave of year-end transactions fueled by agency owners wishing to sell before any potential tax increases and continued demand by the private equity sponsored acquirers. This is currently straining the resources of everyone involved in the business, including the acquirers themselves, and service providers such as diligence firms and transaction attorneys.

  • This year end will be a race to get transactions completed, given how busy all of the parties are. It is unclear if all of the deals will be completed that are currently in the pipeline.


So What Do We Anticipate for 2022?


Changes in Capital Gains Rates

No one knows what will happen with the Biden administration’s proposed legislative initiatives and the proposed tax increases. This includes President Biden himself, his team, and professionals - such as attorneys and accountants.


President Biden is under pressure from the more liberal and conservative wings of the Democratic party, as well as from legislators representing different geographic locations with different interests, who up to now cannot agree on the terms and size of a draft spending bill and the tax increases and other means to pay for it.


To give you a sense of how confusing the situation is, on September 2nd, Senator Joe Manchin published an op-ed in The Wall Street Journal entitled “Why I Won’t Support Spending Another $3.5 Trillion”, where he called for a pause in the budget reconciliation legislation. Without Senator Manchin’s support, no reconciliation bill will pass because the Democrats will be unable to muster 50 votes in the Senate, and no Republican intends to vote for the current proposed legislation.


From the perspective of insurance brokerage M&A, the most important issue is the potential changes to capital gains rates. As we recently reported in a news flash, on September 13, the House Ways and Means Committee released its version of the proposed tax legislation, which differed sharply from President Biden’s proposals in a number of significant ways - including the proposed increases to capital gains rates.


Under the House Ways and Means proposal, the top capital gains tax rate would increase to 25% from 20%. This is a far cry from the 39.6% top capital gains tax rate proposed by the Biden Administration. The draft legislation currently mandates that 2021 is treated as a transition year, with transactions completed on or before September 13, 2021, or subject to a written binding contract on or before that date, subject to the 20% capital gains rate. All other transactions would be subject to the higher 25% rate. These proposals, of course, are only in draft form and are likely to change, possibly substantially, before being enacted into law.


We are no more able to predict the end result of the current horse trading in Washington than anyone else. If we are to hazard a guess, however, it appears highly unlikely that capital gains rates will be increased by anything close to 20%. Our best guess is that capital gains tax rates may go up modestly, most likely by the 5% in the House Ways and Means proposal.


Acquirer Demand for Insurance Brokers

Under present circumstances, and almost regardless of how things play out in Washington, we anticipate no change in the demand for insurance brokers by acquirers in 2022. They have plenty of dry powder, and the faster they acquire, the higher the returns they generate. Private equity firms continue to have a high degree of interest in investing in insurance brokers, and the number of such investments continues to rise. We do not currently see any exogenous circumstances that would reduce this investment volume or demand, such as economic recession, high interest rates or the like.


The Supply of Sellers Will Likely Decline Early in 2022 from Now

Once the current transaction backlog ends on December 31, we anticipate that there will likely be fewer numbers of companies going to market in early 2022. The reason is that many of the most motivated sellers were looking to sell prior to the end of 2021 to avoid any potential capital gains tax rate increase.


Impact on M&A Multiples

In 2021, acquisition multiples have at times even exceeded those of 2020. The supply/demand curve will likely be even more heavily weighted toward sellers early in 2022. With continued high buyer demand and a relative shortage of willing sellers, competition for quality insurance brokers will remain extremely high among the acquirers in 2022. Multiple acquirers will continue to bid for each acquisition candidate in our processes. In 2022, at the very least, acquisition multiples will remain at peak values. For quality insurance brokerages, competition may push multiples to even more dramatic heights.


In short, 2022 will likely turn out to be a very good time to be selling an insurance agency.


We at Sica | Fletcher are here if you would like to have a discussion about your strategic options – please email or call us: