The brokerage sector has continued to perform well over the past year, with robust organic growth, as clients expanded operations and insurance rates increased in many lines, driving up commission revenue.
Growth through acquisitions slipped for some private-equity-backed brokerages, but several big deals were completed, including Aon PLC’s purchase of NFP Corp.
The world’s 10 largest brokerages reported a combined $79.7 billion in revenue in 2023, up 13.2% over 2022. However, their ranking had several changes, including Arthur J. Gallagher & Co. moving past Willis Towers Watson PLC to take the No. 3 spot (see chart here).
The sector’s outlook remains favorable, though observers say an economic slowdown and a drop in the pace of rate hikes may put more pressure on some companies.
Market
The commercial property/casualty market has continued to see rate increases in most lines over the past year, but the changes varied significantly by line, brokerage executives said.
Property pricing is flattening and directors and officers liability and cyber liability rates are decreasing, but general liability is still a challenging line for policyholders, said Eric Andersen, president of Aon PLC.
“It depends on the industry, it depends on the product, but it is definitely a market that’s not moving in unison up anymore,” he said.
With a lack of new entrants in the market, though, future decreases may be limited, Mr. Andersen said.
“I think you’re going to see more of a stabilization and then some competitiveness on the edges than you will see a full-on give all the money back in two years type of thing,” he said.
While the market is stabilizing and rates vary significantly by client, those seeing rate decreases may not reduce their overall insurance spending, said Greg Zimmer, CEO of Alliant.
“In a hard market, clients oftentimes only have so much they can afford to spend on insurance, so they increase deductibles, lower limits, maybe even remove certain coverages, and then, as the market stabilizes or even softens, often they will take those deductibles back down, take those limits back up, perhaps buy coverage that they elected not to purchase,” he said.
M&A
While mergers and acquisitions among brokerages have come down from the highs of 2021 and 2022, there were still a significant number of deals over the past year. In the first half of 2024, 299 deals were announced, a 23% decline from the same period last year (see story here).
Aon’s $13 billion purchase of NFP was the biggest deal of the past 12 months, but several other Top 100 brokers were also bought, including Cadence Insurance and Eastern Insurance Group LLC, which were bought by Arthur J. Gallagher & Co., and Graham Co. and Fisher Brown Bottrell Insurance Inc., which Marsh LLC purchased. And TIH Insurance Holdings LLC was sold to private-equity investors.
Despite the slowdown in deals, brokerage valuations remain high, with some getting close to 20 times earnings before interest, taxes, depreciation and amortization, said J. Paul Newsome Jr., managing director with Piper Sandler & Co. in Minneapolis.
“That’s a very heady price. You start having trouble making the math work with those kinds of multiples, even though brokerage businesses are oftentimes very profitable businesses,” he said.
Broker valuations vary depending on performance, said John Wepler, chairman and CEO of Woodmere, Ohio-based Marsh, Berry & Co. Inc.
Brokers with high “quality of growth,” or systems and policies in place to generate consistent expansion, see high valuations and stable terms, but lower-performing brokers may have to take more of their consideration in earnouts that depend on future revenue, he said.
But the pace is unlikely to let up significantly.
“I don’t see a material drop-off happening in 2024. There are still a lot of targets out there,” said Julie Herman, a director at S&P Global Ratings, a division of S&P Global Inc.
“This consolidation story has been going on for well over a decade, and I don’t see it ending,” she said.
“There’s no question that consolidation will continue,” said Gregory L. Williams, CEO of Acrisure. “There is so much capital invested in the brokerage space, and that capital is going to continue to fuel consolidation.”
The rhythm of private-equity ownership will also drive deals, said Carl Hess, CEO of Willis Towers Watson PLC. Private-equity firms often target three- to five-year investments in brokerages before either selling or recapitalizing.
“There’s a number of properties that have been owned by their current owners on the private equity side for enough time that the cycle is going to just work its way through, which means continued consolidation,” he said.
Outlook
Brokers continued to report strong organic growth rates in the first quarter of this year, but they may be headed to a slightly more challenging business environment if the economy slows, observers said.
“We think we will see things start to slow down as we get into the second half of this year,” said J. Powell Brown, president and CEO of Brown & Brown Inc.
Brown & Brown clients continue to feel good about their businesses, but companies may be more cautious about making large investments, he said.
While higher interest rates hit some brokers with high debt levels over the past two years, they were fortunate because insurance rates, and therefore their commission revenue, rose at the same time, Mr. Wepler said.
“In a flat market and a flat economy, the average growth rate would have been less than the cost of capital,” he said.
While insurance rate increases are easing in some areas and the economy may slow, Mr. Wepler said interest rates are also expected to decrease, easing the pressure on brokers.
In the changing business environment, brokers’ organic growth rates will likely also slow, Mr. Newsome said.
“And an outstanding question is, can they continue to improve their margins, given how high they are already?” he said.
Brokers have benefited from years of rising premiums, but declining rates will likely restrain their growth, said Meyer Shields, Baltimore-based managing director at Keefe, Bruyette & Woods Inc.
“Those tailwinds are going to fade. This is still a cyclical industry,” he said.
Organic growth levels may come down from the double-digit percentage growth that some saw last year, said Evelyn Ocas Salazar, assistant vice president-analyst at Moody’s Investor Service Inc. in New York.
“This year, it’s going to be a little lower, in the mid-single digits, maybe some in the upper single digits,” she said.
“You’re going to start seeing some tailwinds moderate over time, but we’re talking from high levels,” said Ms. Herman of S&P. “Mid-single-digit organic growth would still be a robust organic growth trajectory,” she said.
One economic trend that has not held back brokers is elevated inflation levels, said J. Patrick Gallagher Jr., chairman and CEO of Arthur J. Gallagher.
Insurance brokerage is one of the few business sectors that benefits from inflation, providing it does not cause a recession, because it drives up the cost of goods, which results in increased premiums, he said.
It also benefits brokerages with alternative risk transfer capabilities, Mr. Gallagher said.
It “helps us work with clients that would like to reduce (costs) through the use of self-insurance,” he said.
Michael Bradford and Claire Wilkinson contributed to this report.
