PE-driven M&A is slowing, despite record deals in 2023

Despite some consolidators slowing their pace — namely, private equity firms — Canadian insurance brokerage M&A reached a record level of deals in 2023.

There were 108 publicly announced deals last year, Smythe LLP, a P&C insurance advisory and consulting firm, reported in its Canadian Insurance Brokerage Industry Update.  “This trend represents at least a continuation of the uptick in activity in this space since 2020, with 76 publicly announced deals in 2022 and 64 in 2021,” the report states. 

Deals peaked at 31 in 2023 Q2 and were lowest in 2023 Q1 (20). Last year, the third and fourth quarters saw 27 and 30 deals, respectively. These figures tally P&C, life and group health brokerages, and managing general agents.  

Private equity (PE)-backed consolidators drove 53% of last year’s deals, followed by insurer or insurer-backed acquirers (29%), regional brokers (9%), or other acquirer types (9%). “PE-backed firms continue to be the driving force behind consolidation over the past decade,” Smythe observed.  

That said, the proportion of PE-backed acquisitions has shown a gradual decrease since the pandemic years. PE-backed acquisitions dominated at 70% in 2020 and then slipped to 61% in 2021.  

However, even with the gradual decline of PE-spearheaded deals, “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,” Smythe wrote.  

The report found it’s becoming more difficult for smaller, independent brokerages to compete for M&A growth with large consolidators. This is due, in part, to rising operating costs and higher volume requirements in certain markets.  

This is leading some smaller brokerages to outright sell their brokerage or, in some cases, join broker resource networks in order to remain competitive. 

“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 who [to sell to] and when to exit their brokerages,” Smythe wrote.  

Regionally, Ontario dominated as the location with the most M&A deals, tallying 54 transactions. Alberta followed with 17, B.C. with 14, then Quebec (7), Manitoba (6), New Brunswick (4), Saskatchewan (3), Nova Scotia (2) and Newfoundland and Labrador (1).  

The demand for retail brokerages in provinces with public auto insurance (British Columbia, Saskatchewan, Manitoba, and Quebec) remains weaker than their exclusively-private counterparts, though the advisory firm noted exceptions for brokerages with strong performance in commercial auto.  

As for what these figures mean into 2024, Smythe noted certain consolidators will “look inward” and refocus on creative value, organic growth, and efficiency. However, quality acquisitions still remain an objective this year, although future M&A could be tempered by high inflation and borrowing costs.

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