Insurance brokerage start-ups outpace industry consolidation long-term

Insurance brokerage and agency consolidation may be a never-ending story with start-up and break-away talent centres developing at a pace to offset the M&A consolidation drivers of leading brokerage groups, a key player in the consolidation drive has admitted.

“It’s a little bit of whack-a-mole,” the top officer for the US insurance broking market at Artur J Gallagher, Mike Pesch, said of the M&A market.

Gallagher, one of the most prolific and arguably the most vocal buyer on the brokerage and agency M&A market, has been working from industry analysis suggesting some 30 thousand potential targets nationwide. And those reports have held within several thousand of the headline figure for ages.

Every new M&A deal may breed one or more new start-ups, Pesch said of the enduring market fragmentation.

“As some of these mergers have occurred, …. those that didn't want to be part of the transaction, didn't feel like it was the right home for them, parcel off, so you see a lot more start-ups,” Pesch said.

By the rough view, the trend may be visible in the proportion of firms in the sector sporting revenues below $2 million. “I think it’s because there are some entrants that have splintered off.”

That puts much of the potential roster underneath the Gallagher radar screen. Gallagher is targeting firms with revenues in a range that Pesch calls “$2 million to $10-2- million – and we’ve talked to firms north of $20 million over the past several years.”

That puts the target firm outside of the US top 100, a threshold that Pesch believes starts at neighbourhood $25 million in annual revenue.

The deal flow appears to have slowed in 2022, a slowdown which might be attributable in part to the rise in interest rates and the effect that could have on financing capacity by some would-be buyers, Gallagher now suspects.

“We have started to see some evidence of it,” Pesch said, citing declarations by unspecified competitors that M&A may go to the backburner in 2023 as they hammer out issues with profitability.

Some headline deals announced during the easy-money heyday might not be proving their value, Gallagher CFO Doug Howell further speculated. “I think there is a lot of trumped-up pro-forma income,” Howell said. “I think it is not living up to that.”

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