Strategies have varied, with some public intermediaries being more active in the tuck-in space, and others pursuing mega deals.
For instance, both Marsh – via Marsh McLennan Agency (MMA) – and AJ Gallagher have frequently announced tuck-in acquisitions, while Brown & Brown has largely operated in the US mid-market, and in the smaller end of broking deals. Baldwin Risk Partners (BRP) has also followed a similar strategy but is currently looking to de-lever.
Meanwhile, Aon and WTW are less likely to play in the small agency segment and have looked for larger deals in recent years – including a ~$30bn failed merger between the two – as has Marsh, with JLT’s $5.6bn acquisition.
But after years of rising activity, overall broking M&A has started to decelerate, as inflation rose in the US, and the Fed hiked interest rates by ~400 bps in response, increasing the cost of capital.
As the Q4 earnings season wraps up against this backdrop, let’s take a closer look at public broker performance in 2022, and how their strategies have unfolded throughout the year.
M&A activity slowed down in H2 last year after reaching all-time highs in 2021, although transactions remained above pre-pandemic levels.
Dealmaking went down 19% to 748 transactions, according to MarshBerry, while acquired revenues fell over 30% to $2.5bn and deal size also trended down, dropping from $4.46mn in 2021 to $3.44mn in 2022, according to Sica Fletcher figures.
Among the different types of buyers in the brokers, public intermediaries saw a 21% decrease in transactions and private firms experienced a 22% decline.
Amid current macro conditions, acquirers have become more disciplined and are looking for companies that show greater organic growth potential than themselves, according to MarshBerry.
The insurance-focused boutique investment bank noted: “If the average buyer is growing at 8%-10%, why would they be interested in a firm that grows less than that?”
Just like deal activity in 2022, M&A commentary among public brokers was not uniform during Q4 earnings calls.
On one side, BRP has not downed tools entirely, but the firm has indicated it will be highly selective this year.
BRP CEO Trevor Baldwin told analysts: “From a BRP perspective, I think 2023, I would not model any M&A. We'll continue to be looking at opportunities, and there may be some small opportunities that arise, that are interesting, but we're focused on continuing to de-lever the business.”
“The reality is the cost of capital is up meaningfully,” he said. “[And] while the nominal number of transactions was not down precipitously [in 2022], the volume of acquired revenue was.”
Other players, however, are expected to pursue a strong pipeline given their current war chest.
Gallagher CFO Doug Howell noted that the broker estimates towards $3bn of dry powder to fund potential M&A opportunities this year.
“Our current cash position, combined with strong expected cash flows and incremental borrowing, positions us well for our pipeline of M&A opportunities,” he said.
Overall, public broker executives added that they have not yet seen current market conditions reflected in agencies’ valuations, but some anticipate seeing downward pressure on multiples very soon.
“We're kind of at this unusual clash point,” said Brown & Brown CEO J Powell Brown. “Buyers would like to see a slight decrease in multiples paid. And yet there are businesses, some of which are owned by private equity that would like to monetize their businesses at what were historic levels or multiples.”
Now, let’s break down each player’s deal activity in 2022.
The group's risk and insurance services division – which is constituted by Marsh and Guy Carpenter – completed 16 acquisitions in 2022, while the consulting division sealed four deals, up from eight and one acquisition, respectively, in 2021.
All of the firm’s deals combined in 2022 represented a total purchase consideration of $705mn – including $579mn in cash – down from $1.4bn in 2021, which included a $390mn from an investment in Marsh India and $888mn of cash.
While Marsh McLennan didn't disclose the purchase price of each of its 2022 acquisitions, the company noted that the $705mn net assets acquired last year primarily reflected the acquisition of HMS Insurance Associates in December by Marsh McLennan Agency (MMA), according to its latest 10-K.
On the sales front in 2022, the broker said Mercer sold its US affinity business that provided insurance marketing, brokerage and administration services to affinity groups for $140mn.
In addition, last year the company sold certain businesses in the UK, Czech Republic, Brazil and Belgium for cash proceeds of approximately $15mn. Meanwhile, in 2021 the firm sold certain assets in the US and UK for ~$84mn.
Aon struck five takeover deals in 2022, up from two deals the prior year.
For the five acquisitions in 2022, Aon reported total net assets acquired of $170mn with a cash consideration of $161mn.
In addition, Aon recorded three disposals in 2022 and six in 2021. The pre-tax gains recognized related to the sales were $54mn last year and $142mn in 2021.
AJ Gallagher sealed 37 deals in 2022, almost in line with 2021 transactions.
However, the company acquired revenue went down to $244mn last year from $952mn in 2021, when the firm bought Willis Re.
The acquisitive Illinois-based intermediary booked $1.3bn of total purchase considerations in 2022 and $417.7mn of maximum potential earnout payables, down from almost $4.7bn and $969.4mn in 2021, respectively.
However, last year's figures include nearly $3.2bn from Willis Re's takeover, Gallagher's largest deal to date, and a potential additional consideration of $750mn subject to certain third-year revenue targets.
In its 2022 10-K, Gallagher noted that after the Willis Re deal closed in December 2021, there were 12 remaining international operations with deferred closings that comprised ~$180mn of the initial purchase price that were subject to local regulatory approvals. But all 12 closed in 2022.
The table above, however, does not include the ~$660mn acquisition of human resource and employee benefits consulting firm Buck, which Gallagher struck on December 20 and is expecting to complete in the first half of 2023.
Gallagher's aggregate amount of maximum earnout obligations related to acquisitions made in 2019 and subsequent years was $1.95bn as of December 31, 2022. The broker's recorded earnout payables are mostly estimated based on future operating results of the acquired entities over a two- to three-year period.
Brown & Brown
2022 marked an all-time-high for Brown & Brown on the M&A front.
The Floridian retailer acquired the assets and assumed certain liabilities of 12 insurance intermediaries, took over all the stock of 11 brokers, and agreed to buy seven books of business, compared with 13, two and three, respectively in 2021.
The broker's acquired revenue last year jumped to $435mn from $132mn in 2021, well over its $163mn 10-year average.
Brown & Brown's total net consideration in 2022 was $2.6bn, up from $549.4mn in 2021 although maximum potential earnout payables were $112.4mn, down from $162.3mn the prior year.
The Floridian's earnout liabilities are typically calculated based on performance over a one-to-three-year period, according to a recent investor presentation.
Last year's figures were largely driven by the $1.85bn takeover of GRP in July and the $487mn acquisition of Orchid Underwriters Agency. In 2021, the company's largest deal was the $137.7mn acquisition of O'Leary.
WTW, BRP and Ryan Specialty
WTW paid $111mn in cash for acquisitions that were completed in 2022, up from $52mn the prior year, while contingent and deferred considerations were valued at $28mn in 2022, compared with $21mn in 2021.
BRP completed three deals in 2022: The acquisitions of Westwood Insurance Agency, Venture Captive Management and National Health Plans & Benefits Agency.
The Floridian broker paid an aggregate price of $413.8mn for the three assets, including $385.6mn for Westwood, compared with 16 deals in 2021 for a total consideration of $1.1bn.
BRP recorded a total contingent earnout consideration of $14.9mn for 2022 deals, compared with contingent earnouts of $127.4mn in 2021, according to the respective annual reports.
The firm's largest deal in 2021 was the $219.7mn acquisition of mid-market focused firm Jacobson, Goldfarb & Scott followed by the $195.5mn takeover Rogers Gray and $175.8mn for Construction Risk Partners.
Finally, Ryan Specialty also saw some action last year with the $7.7mn acquisition of certain assets of Centurion Liability Insurance on November 1. The Chicagoan wholesaler also struck a $116.7mn deal to buy Griffin Underwriting, but that deal didn’t close until January this year.
Last year, the company bought the remaining units of Ryan Re on March 31 and acquired Crouse and Associates for over $110mn on December 1.
In addition, on December 31, 2021, the firm acquired certain assets of Keystone Risk Partners for $59.8mn.
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