Canadian Insurance Brokerage Industry Update

Canadian insurance brokerage M&A activity has exhibited a consistent upward trend for the past decade, reaching new heights in 2023. This article aims to explore the key trends and observations that have defined brokerage M&A in 2023.

Latest Update

2023 was a record-breaking year for Canadian brokerage M&A market with 108 publicly announced insurance brokerage transactions (including P&C, life and group health brokerages and managing general agents). 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 deal volume in the first quarter of 2023 was relatively comparable to 2022 and 2021 as acquirers were adapting to the new high interest rate environment. As interest rates stabilized throughout 2023, deal volume increased with the overall activity in Q2, Q3 and Q4 2023 being higher than any other quarter since 2018. We expect certain acquirers will look inward in 2024 and refocus on value-creation, organic growth and efficiencies, however there will remain a robust appetite for quality acquisition opportunities going into 2024. It continues to be a seller’s market with fewer opportunities than capital available for acquisitions. With the challenges of a running a smaller independent operation, and succession planning and retirement at the forefront for many brokerage owners, we expect M&A activity to remain steady in 2024.

Geographic Breakdown

The provinces of Ontario and Alberta represent the largest proportion of M&A activity in Canada in 2023. As expected, 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. The decreased interest in public auto environments is also reflected in the decreasing/flat market value of standalone auto licenses in certain provinces.

Major Players in Brokerage M&A

Private equity-backed consolidators have continued to dominate M&A activity, being responsible for 53% of acquisitions in 2023. Insurer-backed acquisition activity surged in 2022 and remained strong in 2023, PE-backed firms continue to be the driving force behind consolidation over the past decade.

Key Observations

We’ve observed the following trends based on the transactions we’ve been involved with this year:

  • Smaller independent brokerages are finding it increasingly difficult to compete as they are unable to keep up with the rising costs of operating a brokerage, along with maintaining access to a full roster of markets due to higher volume requirements. In some cases, this is leading to decisions to sell outright, and in other cases, these brokerage owners are considering joining one of several networks that pool resources for scale and leverage for market access and other shared resources.
  • More important now than ever, organic growth is paramount. For niche insurance product offerings or program business, acquirer interest will depend on the growth opportunities, and their ability to cultivate and support that growth.
  • P&C consolidators are expanding the scope of their acquisition strategies, demonstrating a noticeable increase in acquiring life and group health entities, securing claims management talent through acqui-hires, and engaging in additional services within the same business vertical. This trend reflects a convergence of business activities within the P&C sector.
  • Acquirers have become more selective about brokerages they will acquire, with an increase in demand for B2B (i.e., commercial lines P&C or group benefits focused brokerages with a specialization or program business, above-average organic growth, youthful expertise (“acqui-hire”), technological advancements and online distribution, and specific geographic and regulation considerations. There is still a market for traditional, personal-lines focused brokerages, particularly those with scale or a concentration of high-net-worth clientele. It’s important for any brokerage to demonstrate strong retention and growing PIF count in order to maximize value.
  • With an increase in the cost of capital, certain acquirers have slowed down their pace of acquisition, however this is dependent on their existing cash flow, leverage and cost of capital.
  • 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.
  • Valuation multiples are increasingly driven by EBITDA, however revenue multiples are still quoted as a floor value when brokerages have lower-than-average profitability. That being said, this is mostly the case when an acquirer believes an acquisition target’s cost-structure can be improved. We are seeing EBITDA multiples ranging from 10x on the low-end of the range to over 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 vs. all-cash deals. Prior to the new debt environment, share consideration was primarily used for retention and management purposes, however it is now 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 who and when to exit their brokerages.

Public broker EV/EBITDA multiples

If you have any inquiries or require further information regarding brokerage mergers and acquisitions or valuation matters, please don’t hesitate to reach out.