Will there be more insurance brokerage groups in 2022?

In recent years, as the world grapples with the COVID-19 pandemic and related economic challenges, the insurance brokerage space has proven to be very profitable, lucrative and resilient, according to partner Mark Friedman. of PwC’s Financial Services Deals practice where he supports private equity firms and companies in their transactions in the insurance sector.

“When COVID hit, there was a brief disruption in the global financial markets, but some industries came out better and cleaner than others,” Friedman told Insurance Business. “The insurance brokerage industry has proven to be extremely nimble during this time. We have had conversations with private equity clients who have said, “Wow, with all the attention and intervention we put into our portfolio, not the least of our attention and concern was focused on the industry. insurance brokerage ”.

“Obviously there are concerns about this latest variant of COVID [Omicron], what if we could find ourselves in another disruptive time for the market. But I think companies are making contingency plans and the insurance brokerage industry is going full steam ahead. We have very few worries [and we expect] continued and increased interest in brokerage consolidation.

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However, the market is reaching an “interesting inflection point,” according to Friedman. The big four insurance brokerages Aon, Marsh, Willis Towers Watson and Gallagher continue to grow, however, the mega-deal market is under increased regulatory scrutiny, particularly in the United States.

A notable example is the end of the merger between Aon and Willis Towers Watson, 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 ”, this unsuccessful merger did not prevent Willis from moving forward with the sale of its Willis Re operations to Arthur J. Gallagher for US $ 3.25 billion. This agreement was concluded on December 1, 2021.

“I think it’s safe to say that we won’t see a lot of mega-deals in insurance brokerage. [in 2022], but I think the consolidation of the midsize and smaller brokerage firms will absolutely continue, ”Friedman said.

“What could be really interesting in the brokerage distribution space is that we could see a wave of IPOs [initial public offering] activity. We’ve seen this before, but there are a number of players who have traded between private stocks, but due to their growth – both organic and inorganic – I think they end up at valuations that are. probably more suited to public procurement compared to another private equity business.

“As you move up the value chain, the number of active buyers drops dramatically once you hit a certain valuation threshold. Most private equity firms will not, at least on their own, take on a $ 10 billion deal. So you start to get to that point where we start to see a lot more conversations around potential capital increases through public markets versus a sale or switch to private equity. “

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Brokerage valuations are increasing in part due to difficult market conditions and rate increases in many P&C and specialty lines. As Friedman pointed out, this is a positive wind for the brokerage industry, as rate hikes tend to equate to higher commissions.

“We are also seeing disruption in terms of climate, environment and weather, so companies are definitely lowering retention levels and insuring more because of these risks,” he added. “So while you don’t see a lot of overall premium growth other than a few rate hikes, we’re definitely seeing more insurance uptake, just given the volatility and some of the catastrophic events that we have. seen over the past decade. “

The PwC partner was very positive about the outlook for insurance brokerage consolidation in 2022. He called it a “very strong and competitive market” where valuations continue to rise.

“We’re still seeing this trade-off between the value of a larger player in terms of multiple, versus some of the smaller players with a dozen brokers,” Friedman commented. “It’s still very attractive, and the debt markets are still very competitive, the rates are really low and the lenders are eager to lend. Assuming everything stays in place, we would definitely expect to see this trend. [of brokerage consolidation] continue – although probably less on the mega-chord side, but more [mid-tier and smaller brokerage] consolidation.”

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