Will there be more insurance brokerage consolidation in 2022?

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 highly profitable, lucrative and resilient, according to Mark Friedman, Partner of PwC’s Financial Services Deals practice where he assists private equity and corporate clients with their transactions in the insurance industry.

“When COVID hit, there was a brief disruption across the capital markets, but some sectors came out better and cleaner than others,” Friedman told Insurance Business. “The insurance brokerage space has proven to be extremely nimble during this time. We’ve had conversations with private equity clients who have said, ‘Wow, all the attention and intervention while we were playing in our portfolio, the least of our attention and concern was focused on the insurance brokerage sector.”

“Obviously there are some concerns around this latest COVID variant. [Omicron], and whether we could find ourselves in another disruptive period for the market. But I think companies are making contingency plans and the insurance brokerage space continues to grow. We have very little to worry about [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 brokers Aon, Marsh, Willis Towers Watson and Gallagher continue to grow, however, the mega-deal market is coming under increased regulatory scrutiny, particularly in the United States.

A notable example is the end 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 “, 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 midsize and smaller brokerages 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 a few already, but there are a number of players who have moved back and forth between private actions, but because of their growth – both organic and inorganic – I think they end up at valuations that are probably more suited to the public markets versus another private equity business.

“As you move up the value chain, the number of active buyers drops dramatically once you reach a certain valuation threshold. Most private stocks won’t accept a deal, at least not by themselves, in the US$10 billion range. So you’re starting to get to that point where we’re starting to see a lot more conversations about potential capital raises through public markets than through public markets. a sale or a move to private equity.

Read more: AXA reaches an agreement to sell a bank and take over an insurance company

Brokerage valuations are rising in part due to difficult market conditions and rate increases in many lines of property and casualty and specialty insurance. As Friedman pointed out, this is a tailwind for the brokerage industry because rate increases tend to equate to higher commissions.

“We are also seeing disruptions in terms of climate, environment and weather, so companies are definitely reducing retention levels and insuring more due to these risks,” he added. “So while you’re not seeing a lot of overall premium growth, other than some rate increases, we’re certainly seeing more adoption of insurance, just given the volatility and some of the catastrophic events that we’ve had. 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 always see this trade-off between the value of a bigger player in multiple terms and some of the smaller players with a dozen brokers,” Friedman commented. “It’s still very attractive, and debt markets are still very competitive, rates are really low and lenders are eager to lend. Assuming everything stays in place, we certainly expect to see this trend [of brokerage consolidation] continue – albeit probably less on the mega-deal side, but more [mid-tier and smaller brokerage] consolidation.”

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