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Brokers prosper despite uncertain economy

market update

Many insurance agents and brokers reported rapid growth in 2021 as rates continued to rise, economic activity recovered from the lockdowns of the prior year, and mergers and acquisitions activity hit record levels.

The sector continues to report growth in 2022, but the outlook for the rest of the year is unclear as rising interest rates and uncertainty over the economy hang over many businesses.

Higher borrowing costs may reduce valuations for brokers selling their businesses, and increases in commissions may slow as commercial insurance price hikes come off their recent highs, observers say. And if the economy slows further, overall revenue growth may be crimped.

The high growth rate of 2021 is reflected in Business Insurance’s rankings of the world’s 10 largest brokers and the biggest 100 brokers of U.S. business.

All but one of the world’s largest brokers reported double-digit brokerage revenue growth in 2021 (see chart page 26). Several reported multiple acquisitions, but organic revenue growth was also strong. A major acquisition by Alliant Insurance Services Inc. saw the Irvine, California-based company’s brokerage revenue increase more than 45%, as it entered the Top 10 for the first time, leapfrogging USI Insurance Services LLC, which reported 11.4% brokerage revenue growth.

Among the Top 100, several acquisitive brokers reported triple-digit revenue growth, while other brokers reporting low double-digit growth slipped down the ranking (see chart).

Publicly owned brokerages continued to report solid revenue growth in their 2022 first-quarter results.

“We haven’t seen these organic growth numbers for quite a while,” said Julie Herman, director in New York with S&P Global Ratings. At the end of 2021 and into 2022, brokers have had “all the wind at their back,” she said.

In 2021, rising property/casualty rates and a strong economy provided excellent business conditions for brokers, said Mark Dwelle, director, insurance equity research, at RBC Capital Markets LLC in Richmond, Virginia.

“Time will tell what way the economy really breaks at the end of the day, but they’re unlikely to see conditions as strong as what we saw in 2021; we’ve only seen a couple of years like that in the last two decades,” he said. 

Increased inflation could have a variety of effects on the brokerage business, company executives said.

“Inflation is going to drive exposure units for our clients,” said Martin South, president and CEO of Marsh LLC. 

Property owners will see increases in the valuations they have to insure, and claims costs will increase, said J. Patrick Gallagher Jr., president, chairman and CEO of Arthur J. Gallagher & Co.

“Everything from the cost of goods to rebuild to the cost of labor to rebuild is going to be up,” he said.

As insurance premiums rise, commission-based compensation for brokers should also rise. But increases in prices don’t always lead to higher revenue for brokers, said Eric Andersen, president of Aon PLC.

“A decent part of our business isn’t tied to the market cycle at all,” Mr. 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 Mr. Dwelle of RBC. 

They will remain under pressure to grow their revenue as expenses such as salaries and technology spending rise and travel and entertainment expenses rebound after the pandemic, he said.

Mergers and acquisitions

The recent increases in interest rates could have an effect on the mergers and acquisitions climate for brokers, but it is unclear whether they will reduce the volume of deals.

Agents and brokers saw record levels of M&A activity last year and the first half of 2022 also saw many deals (see story page 37).

Some acquisitive brokers may close fewer deals because of increased borrowing costs, said Meyer Shields, Baltimore-based managing director at Keefe, Bruyette & Woods Inc.

“I think the bottom line will be less activity, because the costs are more obvious in terms of the associated debt,” he said.

J. Powell Brown, president and CEO of Brown & Brown Inc., though, said many brokers are still looking to grow through acquisitions.

“You have a number of buyers, and some of them are newer buyers, who are trying to gain scale and we do think it is going to continue to be competitive for the foreseeable future,” he said.

The insurance sector remains attractive because of the stability it offers, said John Wepler, chairman and CEO of Woodmere, Ohio-based mergers and acquisitions consultancy Marsh, Berry & Co. Inc.

“The evidence is that the insurance market is highly resilient in a down economy. That’s why capital has come into the industry,” he said. 

Private equity investors remain interested in the insurance brokerage sector, said Carl Hess, CEO of Willis Towers Watson PLC.

“Rising rates are a bit of a headwind, but there is still an awful lot of undeployed (private equity) money out there that sees this sector as an incredibly attractive one,” he said.

While deal volume may continue at high levels, the cost of the deals may decline, Mr. Andersen said.

“With (initial public offerings) largely shut down these days and the cost of debt rising you would think it would have an effect on the valuations for the remainder of the year, but it’s hard to tell until you start to see some companies change hands,” he said.

Multiples of profits paid for brokerages have risen for several years, said Ms. Herman of S&P Global.

“It seems like now there would be a case for multiples to go down with interest rates rising, but that hasn’t trickled down yet,” she said.

Market outlook

Insurance buyers should not expect much letup in pricing of coverage, and brokers are working with their clients to help ease the burden of increased premiums, several brokerage executives said.

For clients facing a revenue squeeze on their own business, brokers are looking for ways to contain insurance expenses, Mr. Hess said.

“In general, the environment we’re in makes us work with our clients to see what economies can be taken while they’re still maintaining the coverage they need,” he said.

Increasingly, buyers are looking to levels of deductibles and limits purchased to manage costs, Mr. Brown said.

“I think of it as two big buckets: deductibles, i.e. higher deductibles, or lower limits to manage the overall spend,” he said.

Buyers with captives have made more use of them in the hard market, said Mr. South of Marsh.

The captives enable them to retain frequent and predictable losses while laying off catastrophe exposures, although insurance capacity for cat risks has declined, he said. 

Operational changes

Brokers, like many other businesses, adjusted their operations during the COVID-19 pandemic, but it remains to be seen how many of the changes will be permanent.

“I do think the smart working model and the hybrid model are here to stay, and it will be driven by roles as opposed to just where you live,” said Mr. Andersen of Aon.

Virtual meetings allow brokers to call on resources within a company. For example, an expert on Brazil can easily be added to a U.S. client meeting, he said.

“We’re trying to maintain that discipline that we learned over the past two years as we start to get more in-person engagement with clients and markets,” Mr. Andersen said. 

Aon is also reviewing its office space and considering its options.

“We have tried not to make hard decisions on footprint yet until we really understand the new way people work,” Mr. Andersen said.

Marsh has used digital resources to address the limitations imposed by the pandemic, Mr. South said.

“That said, we’re a professional services firm and our culture is everything to us,” he said. “Conversations are stilted when you don’t have any opportunity afterwards to convene around the watercooler.”

While a small number of staff will need to work in offices full time in the future, many will work fully remotely or a hybrid of work-from-home and working in an office, Mr. Hess said.

“Fully onsite is going to be a pretty small number across most offices, 5% to 10% of population in total. Fully remote will be 20% and the vast bulk of colleagues will be that bit in between,” he said.

Michael Bradford, Matthew Lerner and Claire Wilkinson contributed to this report.

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