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Agency owners must observe and learn about significant new trends in the insurance industry. The following are three critical industry trends insurance agencies should track for 2025. Look for Part Two in January’s column.

2025 M&A Activity and Pricing

The field of buyers has shifted. The pace of acquisitions has slowed for a few reasons. In some situations, buyers are strategically slowing down. Some acquisition activity has been dampened by increased inflation and higher interest rates.

According to OPTIS Partners, the deal count is down 17% in 2024 compared to last year, mainly due to the increased cost of capital. Through the third quarter, 535 mergers and acquisitions were reported. They feel this is a return to an “old normal,” as the deal pace levels off but is still above the pre-2021 flow. They expect the pace to continue as the supply of agencies likely to be acquired in the next five years is significant, and the demand from the investing community remains strong.

The prices currently paid by publicly traded brokers, large regionals and agencies funded by private equity firms are still high. They will continue to be high for valuable, desirable firms. Since the supply is dwindling, the prices may be even higher for those that remain if they fit the profiles of the major buyers today.

As long as insurance agencies remain profitable, there will be buyers. Some buyers with weaker balance sheets may be forced to the sidelines if interest rates do not decrease significantly.

According to our discussions with key acquirers, M&A activity is again expected to continue during 2025 with some caveats. Here are some of their responses:

“Hub is on track to partner with 60+ great merger-partners in 2024 and expects to continue to be very active in bringing on merger-partners in calendar year 2025,” said Clark Wormer, M&A Director for HUB International.

Foundation Risk Partners (FRP) is approaching $700 million of annualized revenue by year-end 2024. They do not announce their transactions but are now in the top 20 largest U.S. independent agency brokers. They made numerous acquisitions this past year and will continue that trend in 2025. FRP is looking for more add-ons and new niches to spread nationwide.

Boston-based Risk Strategies, the retail subsidiary of Accession Risk Management Group, will close transactions totaling $65 million in EBITDA in 2024, adding in an agriculture specialty. The company expects to continue recruiting talent and remain acquisitive in 2025.

Alliant Insurance Services is headquartered in Irvine, California, and is the 5th largest broker in the U.S., with 130 offices. Though Alliant Insurance Services is viewed in the insurance distribution market as having exceptional organic growth year over year, 2024 has been a very strong year on the acquisition front. Alliant closed 24 acquisitions as of October 1 and will continue to seek high-quality businesses that fit well within one or more of their operations in 2025.

Inszone Insurance has already completed 42 acquisitions in 2024, with 10 more in the pipeline by year-end. Their goal for 2025 is to reach 60-70 acquisitions.

Arthur J. Gallagher will continue to be a good player in the acquisition field but they do not advertise the number and value of their transactions. However, they remain competitive and plan to add agencies throughout the country.

BroadStreet Partners, High Street, USI, and other newer buyers, including World Insurance, Relation, ALKEME and Patriot, are funded by private equity and venture capitalists. They continue to aggressively solicit and buy independent agencies.

Acrisure, which had around 100 or more transactions each year from 2019 through 2022, has completed only 22 transactions for the first three quarters of 2024.

There is a broad spectrum of prices today when it comes to deals. Most down payments consist of approximately 80% cash price and the balance in stock.

Sometimes, the stock can be used for key perpetuation candidates to have equity that the seller and buyer want to ensure they remain in the agency after the sale. In this way, they feel a part of it and then have some skin in the game to stay on for years after the key owners retire.

We usually recommend that our sellers take stock as it can give them a significant additional amount of money when they sell it due to the high rate of growth these acquirers have compared to a typical independent agency. Many buyers have been averaging about 30% growth in stock value per year. Smaller books are purchased at around 6.0 to 8.0 times EBITDA. There aren’t many books or agencies today that do not command at least two times revenue at a minimum.

Internal Perpetuation

It is often difficult for small and medium sized independent agencies to perpetuate internally. The next generation often lacks the management and sales skills to replace the majority owner. In some cases, there are no perpetuation candidates at all. If this is the case, an external sale makes much more sense, as an internal sale may not work out, and retired principals don’t want to return to work.

If an owner sells internally, it is usually for less than the value of an external sale. Existing expenses usually will not change, as they do in an external sale. Also, there is a risk that the internal candidates might not work out, and they often don’t have any or very little money to do a buy-out. The terms of internal purchases are typically 20% to 30% down, with the buy-out lasting 5-10 years. The length of pay out time depends on the agency’s cash flow and whether the internal buyer has any money of their own. An internal buyout rarely has an earn-out component, so the value should be conservative to prevent paying too much for the firm.

The internal buyer often uses the agency’s cash flow to pay the loan off over time. Buyers may want the retiring owners to retire after a few years so they can manage the firm without their influence and use their comp and perks to pay off the note.

Often, the retiring principal finances the deal for the internal candidate. Oak & Associates recommends that the internal buyers get a 10-year loan so that the retiring shareholders don’t have to worry about getting paid. Several specialty banks make loans to insurance agencies specifically for internal perpetuation.

We also recommend that all owners of internal sales should consider whether a GRAT (Grantor Retained Annuity Trust) would be the internal perpetuation tool to use if the owners are still healthy. There is typically a minimum payout of five years, and both principal and interest can be deducted.

Potential Tax Law Changes

With Trump’s win as our 47th president, there is little concern about tax increases that were more likely under a Harris administration. Trump’s previous tax plan was expected to expire, with the pre-Trump tax level of 39.6% replacing the current ordinary income tax rate of 34.6%. However, while the rate was lower and the standard deduction higher, state and local tax exemptions were capped at $10,000, which resulted in increased federal taxes for some high-wage earners in certain states with high personal income taxes.

Any change to tax law will require extensive political negotiation, so it is too early to predict what will happen. On the campaign trail, Trump emphasized using tariffs to generate tax revenue. More tariffs will likely occur, but not at the level Trump alluded to. Trump also floated the idea of no income taxes on tips, overtime pay or Social Security income. Those might become unfulfilled campaign promises when the legislators meet. There is a good chance that Trump’s promise to lower corporate taxes will be implemented.

There was no discussion about Trump’s changes to capital gains taxes. The Harris team discussed increasing the rate to 28% for taxable income over $1 million and taxing unrealized capital gains. Any changes to capital gains taxes under the new Trump administration would result from broader tax negotiations. There appears to be no tax reason for business owners to change their schedule at this time when selling their businesses.

For Part Two, see the January 27, 2025 issue of Insurance Journal.

Topics Trends