Many insurance agents and brokers experienced rapid growth in 2021 as rates continued to rise, economic activity recovered from the previous year’s shutdowns, and merger and acquisitions reached record levels.
The sector continues to show growth in 2022, but the outlook for the rest of the year is unclear as rising interest rates and economic uncertainty weigh on many businesses.
Higher borrowing costs could lower the valuations of brokers selling their businesses, and increases in commissions could slow as increases in commercial insurance prices recede from their recent highs, observers said. And if the economy slows further, overall income growth could be dampened.
The high growth rate of 2021 is reflected in Business Insuranceranking of the 10 largest brokers in the world and the 100 largest business brokers in the United States.
All but one of the world’s largest brokerages reported double-digit brokerage revenue growth in 2021 (see chart on page 26). Many reported multiple acquisitions, but organic revenue growth was also strong. A major acquisition by Alliant Insurance Services Inc. saw the Irvine, Calif.-based company’s brokerage revenue increase by more than 45% as it entered the Top 10 for the first time, overtaking USI Insurance Services LLC, which reported brokerage revenue growth of 11.4%.
Among the Top 100, several acquiring brokers reported triple-digit revenue growth, while other brokers reporting low double-digit growth fell in the rankings (see chart).
Public brokerages continued to post solid revenue growth in their Q1 2022 results.
“We haven’t seen these organic growth numbers in quite a while,” said Julie Herman, New York director of S&P Global Ratings. At the end of 2021 and into 2022, brokers had “all the wind at their backs”, she said.
In 2021, rising P&C insurance rates and a strong economy have provided excellent trading conditions for brokers, said Mark Dwelle, director, insurance equity research, at RBC Capital Markets LLC in Richmond, Va. .
“Time will tell which way the economy will really break down at the end of the day, but they are unlikely to see conditions as strong as what we have seen in 2021; we have only seen a few years like it for the past two decades,” he said.
Rising inflation could have various effects on brokerage business, company executives said.
“Inflation is going to boost units of exposure for our clients,” said Martin South, President and CEO of Marsh LLC.
Homeowners will see the assessments they must insure increase and the costs of claims increase, said J. Patrick Gallagher Jr., president, chairman and chief executive officer of Arthur J. Gallagher & Co.
“Everything from the cost of goods to rebuild to the cost of labor to rebuild will go up,” he said.
As insurance premiums increase, commission-based compensation for brokers is also expected to increase. But price increases don’t always lead to higher revenues for brokers, said Eric Andersen, president of Aon PLC.
“A lot of our business is not tied to the market cycle at all,” Andersen said. Fee-based compensation for placements and compensation for other services are not tied to insurance premiums, he said.
But brokers will see other pressures, said RBC’s Dwelle.
They will remain under pressure to increase their income as expenses such as wages and technology spending increase and travel and entertainment spending rebounds from the pandemic, he said.
Mergers and Acquisitions
Recent increases in interest rates could have an effect on the M&A climate for brokers, but it is unclear whether they will reduce trading volume.
Agents and brokers saw record levels of M&A activity last year and the first half of 2022 also saw plenty of deals (see story on page 37).
Some acquiring brokers may close fewer deals due to higher borrowing costs, said Meyer Shields, Baltimore-based managing director at Keefe, Bruyette & Woods Inc.
“I think the main thing will be less activity, because the costs are more evident in terms of the associated debt,” he said.
J. Powell Brown, president and CEO of Brown & Brown Inc., however, said many brokers are still looking to grow through acquisitions.
“You have a number of buyers, and some of them are new buyers, who are trying to build momentum and we think that’s going to continue to be competitive for the foreseeable future,” he said. declared.
The insurance industry remains attractive because of the stability it offers, said John Wepler, chairman and chief executive of Marsh, Berry & Co. Inc., a Woodmere, Wash.-based mergers and acquisitions advisory firm. ‘Ohio.
“The evidence is that the insurance market is very resilient in a down economy. That’s why capital has entered the industry,” he said.
Private equity investors remain interested in the insurance brokerage industry, said Carl Hess, CEO of Willis Towers Watson PLC.
“The rate hike is a bit of a headwind, but there’s still a tremendous amount of undeployed (private equity) money that sees this as an incredibly attractive sector,” he said.
Although trading volume may remain at high levels, the cost of trading could decline, Andersen said.
“With (initial public offerings) largely closed these days and the cost of debt rising, you would think this would have an effect on valuations for the rest of the year, but it is difficult to say. say until you start to see some companies changing hands,” he said.
Earnings multiples paid for brokerages have been rising for several years, said Ms. Herman of S&P Global.
“It looks like now there would be a case for multiples to go down with rising interest rates, but that hasn’t trickled down yet,” she said.
Insurance buyers shouldn’t expect a big drop in coverage prices, and brokers are working with their customers to help ease the burden of rising premiums, several brokerage executives said.
For clients facing a squeeze in revenue from their own business, brokers are looking for ways to contain insurance spending, Hess said.
“Generally, the environment we find ourselves in requires us to work with our customers to see what savings can be made while maintaining the coverage they need,” he said.
Increasingly, buyers are looking to deductible levels and purchased limits to manage costs, Brown said.
“I see it as two big buckets: deductibles, meaning higher deductibles, or lower limits to manage overall expenses,” he said.
Buyers with captives used them more in the hard market, Mr South of Marsh said.
Captives allow them to retain frequent and predictable losses while eliminating catastrophe exposures, although the ability to insure cat risks has diminished, he said.
Brokers, like many other businesses, have adjusted their operations during the COVID-19 pandemic, but it remains to be seen how many changes will be permanent.
“I think the smart work model and the hybrid model are here to stay, and they’ll be driven by roles rather than where you live,” said Aon’s Mr. Andersen.
Virtual meetings allow brokers to tap into resources within a company. For example, an expert from Brazil can easily be added to a meeting with a US client, he said.
“We’re trying to maintain that discipline that we’ve learned over the past two years as we begin to get more face-to-face engagement with customers and markets,” Andersen said.
Aon is also looking at its office space and considering its options.
“We’ve tried not to make any tough footprint decisions yet until we really understand the new way people work,” Andersen said.
Marsh used digital resources to cope with the limitations imposed by the pandemic, Mr. South said.
“That said, we’re a professional services company and our culture is everything to us,” he said. “Conversations are stuffy when you no longer have the opportunity to gather around the water cooler.”
While a small number of employees will need to work from offices full-time in the future, many will work entirely remotely or a mix of working from home and working in an office, Mr. Hess said.
“Fully onsite will be a fairly small number in most offices, 5% to 10% of the total population. Fully remote will be 20% and the vast majority of colleagues will be somewhere in between,” he said. he declares.
Michael Bradford, Matthew Lerner and Claire Wilkinson contributed to this report.