Over the past few years, as the world has grappled with the COVID-19 pandemic and related economic challenges, the insurance brokerage space has proven to be very profitable, lucrative, and resilient, according to Mark Friedman, a partner in PwC’s Financial Services Deals practice where he supports private equity and corporate clients with transactions in the insurance sector.
“When COVID hit, there was a brief disruption to the overall capital markets, but certain sectors came out better and cleaner than others,” Friedman told Insurance Business. “The insurance brokerage space proved to be extremely agile through that period. We’ve had conversations with private equity clients who have said: ‘Wow, of all the attention and intervention we were playing in our portfolio, the least of our attention and worries were focused on the insurance brokerage sector’.
“Obviously, there are some concerns around this latest COVID variant [Omicron], and whether we could end up in another disruptive period for the market. But I think companies are putting together contingency plans, and the insurance brokerage space is continuing full force ahead. We have very little concern [and we expect] continued and increased interest in brokerage consolidation.”
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However, the market is hitting an “interesting inflection point,” according to Friedman. The big four insurance brokerages of Aon, Marsh, Willis Towers Watson, and Gallagher are continuing to grow, however, the market for mega deals is facing increased regulatory scrutiny, especially in the United States.
A notable example of that was the termination of the Aon and Willis Towers Watson merger, which ultimately collapsed under pressure from the US Department of Justice in the summer of 2021. However, as PwC pointed out in ‘Insurance Deals Insights,’ that unsuccessful merger did not stop Willis from moving forward with the sale of its Willis Re operations to Arthur J. Gallagher for US$3.25 billion. That deal closed on December 01, 2021.
“I think it’s safe to say we won’t see many mega deals in the insurance brokerage space [in 2022], but I think the consolidation of mid-tier and smaller brokerages will absolutely continue,” said Friedman.
“What could be really interesting in the brokerage distribution space is we could see a wave of IPO [initial public offering] activity. We’ve already seen some, but there’s a number of players that have traded back and forth between private equities, but due to their growth – both organic and inorganic – I think they’re finding themselves at valuations that are probably more suitable for the public markets versus another private equity trade.
“As you get up the chain of value, the number of active buyers diminishes significantly once you hit a certain valuation threshold. Most private equities won’t take on a deal, at least not on their own, in the US$10 billion range. So, you start to get to that point where we’re starting to see a lot more conversations around potential capital raises through public markets versus through a sale or flip to private equity.”
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Brokerage valuations are increasing partly due to the hard market conditions and rate increases in many lines of property and casualty (P&C) and specialty insurance. As Friedman pointed out, this is a tailwind for the brokerage sector because rate increases tend to equate to greater commissions.
“We’re also seeing disruption in terms of climate, environment, and the weather, so companies are definitely reducing retention levels and insuring more because of those risks,” he added. “So, while you don’t see much growth overall in premium, other than some rate increases, we’re definitely seeing greater uptake in insurance, just given some of the volatility and some of the catastrophe events that we’ve seen over the last decade.”
The PwC partner was very positive about the prospects for insurance brokerage consolidation in 2022. He called it a “very strong and competitive market” where valuations continue to go up.
“We still see that arbitrage between what a larger player is valued at in terms of multiple, versus some of the smaller players with a dozen or so brokers,” Friedman commented. “That’s still very much appealing, and debt markets are still very competitive, rates are really low, and lenders are eager to lend. Assuming all stays in place, we definitely expect to see that trend [of brokerage consolidation] to continue – albeit probably less on the mega deal side, but more [mid-tier and smaller brokerage] consolidation.”