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Brokers are thriving despite uncertain finances

Many insurance agents and brokers reported rapid growth in 2021 as prices continued to rise, economic activity recovered from the downturns last year and merger and acquisition activity hit record levels.

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

Higher borrowing costs can reduce valuations for brokers who sell their companies, and increases in commissions can slow down when price increases for commercial insurance come from the recent peaks, observers say. And if the economy slows further, total revenue growth may shrink.

The high growth rate in 2021

is reflected in Business insurances ranking of the world’s 10 largest brokers and the top 100 brokers of American companies.

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

Among the top 100, several acquisition brokers reported triple-digit revenue growth, while other brokers that reported low double-digit growth slipped down the rankings (see chart).

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

“We haven’t seen these organic growth figures in a long time,” said Julie Herman, head of S&P Global Ratings in New York. By the end of 2021 and into 2022, brokers have had “all the wind in their sails,” she said.

In 2021, rising real estate / accident rates and a strong economy provided excellent business conditions for brokers, says Mark Dwelle, Director, Insurance Equity Analysis, at RBC Capital Markets LLC in Richmond, Virginia.

“Time will tell how the economy will really collapse at the end of the day, but it is unlikely that they will see conditions as strong as what we saw in 2021; we have only seen a couple of years like this in the last two decades,” he said. .

Increased inflation can have a variety of effects on the brokerage business, said business leaders.

“Inflation will drive exposure units for our customers,” said Martin South, President and CEO of Marsh LLC.

Property owners will see increases in the values ​​they have to insure, and claims costs will increase, says 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 will increase,” he said.

As insurance premiums rise, commission-based compensation to brokers should also rise. But price increases do not always lead to higher revenues for brokers, says Eric Andersen, CEO of Aon PLC.

“A decent part of our business is not tied to the market cycle at all,” Andersen said. Fee-based compensation for investments and compensation for other services are not tied to insurance premiums, he said.

But brokers will see other pressures, said Mr. Dwelle from RBC.

They will remain under pressure to increase their revenues as expenses such as salaries and technology expenses increase and travel and entertainment costs recover after the pandemic, he said.

Mergers and acquisitions

The recent interest rate increases may have an effect on the merger and acquisition climate for brokers, but it is unclear whether they will reduce the volume of transactions.

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

Some brokers may close fewer deals due to increased borrowing costs, says Meyer Shields, Baltimore-based CEO at Keefe, Bruyette & Woods Inc.

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

However, J. Powell Brown, President and CEO of Brown & Brown Inc., said that many brokers still want to grow through acquisitions.

“You have a number of buyers, and some of them are newer buyers, who are trying to win scale and we believe it will continue to be competitive for the foreseeable future,” he said.

The insurance industry remains attractive because of the stability it offers, says John Wepler, President and CEO of Woodmere, Ohio-based consulting firm Marsh, Berry & Co. Inc.

“The proof is that the insurance market is very resilient in a downturn economy. That is why capital has entered the industry,” he said.

Private equity investors are still interested in the insurance brokerage sector, says Carl Hess, CEO of Willis Towers Watson PLC.

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

Although the volume of business can continue at high levels, the cost of business can decrease, Andersen said.

“With (IPOs) largely closed these days and the cost of debt rising, you would think it would have an effect on valuations for the rest of the year, but it’s hard to say until you start seeing some companies change owners,” he said.

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

“It seems that there would now be a case for multiples to go down with interest rates rising, but it has not seeped down yet,” she said.

Market prospects

Insurance buyers should not expect much deferral in the 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 limit insurance costs, said Mr. Hess.

“In general, the environment we are in allows us to work with our customers to see what savings can be made while still having the coverage they need,” he said.

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

“I think of it as two big buckets: deductible, ie higher deductible, or lower limits for managing the total expenses,” he said.

Buyers with prisoners have used them more in the tough market, said Mr. South of Marsh.

The prisoners enable them to maintain frequent and predictable losses while postponing disaster exposures, even if the insurance capacity for cat risks has decreased, he said.

Operational changes

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

“I think the smart work model and the hybrid model are here to stay, and it will be driven by roles as opposed to just where you live,” says Andersen from Aon.

Virtual meetings allow brokers to use resources within a company. For example, an expert in Brazil can easily be added to an American customer meeting, he said.

“We try to maintain the discipline we have learned over the past two years as we begin to gain more personal engagement with customers and markets,” said Andersen.

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

“We have tried not to make difficult decisions about footprints until we really understand the new way people work,” said Andersen.

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

“That said, we are a professional service company and our culture is everything to us,” he said. “The conversations are stilted when you have no opportunity to gather around the water cooler afterwards.”

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

“Completely in place will be a fairly small number in most offices, 5% to 10% of the population in total. The far distance will be 20% and the vast majority 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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