Themes That Will Shape the Insurance Distribution Market in 2024
-
bookmark
-
print
Less than a month into the new year and 2024 is already distinguishing itself from the last. Inflation is moderating, the steady diet of interest rate hikes appears to be at an end, and the economy is seemingly on track for a soft landing (fingers crossed). Despite this shifting market paradigm, we expect many of the storylines that shaped the insurance and insurance distribution sector over the past 12 months to persist.
2023 – A Look Back
Despite the headwinds caused by the highest interest rate environment we’ve seen in the past two decades, 2023 marked another strong year for the insurance brokerage industry.
Inflation (pricing and social) and increased CAT activity supported a hard (but softening) market in the property and casualty (P&C) insurance space, leading to higher premiums and more restrictions on coverage. Last year, we saw several national carriers fully or partially exit markets like California, Florida and Louisiana, in turn, having a positive impact on organic growth for the sector. Organic growth held up better than expected, with many public and private brokers posting high single-digit organic growth and select platforms in the double digits.
Due to the high-interest rate environment, M&A activity in the distribution sector slowed significantly, especially when compared to 2021 highs. Since its 2021 peak, M&A activity by deal count fell by 48% in 20231; however, don’t mistake the muted market for lack of buyer interest. While there were fewer buyers at the table, those who remained were well-capitalized, motivated and willing to “stretch” for well-run platforms; said simply, management teams are “picking their spots.” Case in point, we closed the year out with a marquee M&A transaction in Aon’s announced acquisition of National Financial Partners for US$13.4 billion in December.2
As useful as it can be to identify trends predicting how valuations might evolve over the next 12 months, that won’t be easy in 2024. Just as the 2023 M&A valuation environment couldn’t be painted with a broad brush, we expect valuations will remain deal-specific this year.
The rate environment impacted both strategic and sponsor buyers’ expectations differently, namely impacting expectations around future M&A volumes and price, ability to pay and investment return hurdles. All the while, tuck-in valuations for well-run platforms certainly didn’t soften. We continue to see a premium being placed on platforms demonstrating market leadership, growing above market organically and able to execute on M&A.
2024 – A Look Ahead
As we look ahead into 2024, the buzzwords and phrases of 2023 will remain: organic growth, integration, specialty, margin enhancement (outside M&A) and value proposition. These will continue to be major themes to watch and underpin a number of key questions, including whether the sector will maintain its strong organic growth trajectory in what is arguably a once-in-a-lifetime hard market. If so, at what level of organic growth does margin expansion become more challenging?
Social and lawsuit inflation has emerged as a theme that could further impact the industry’s organic growth trajectory. Casualty lines (excluding work comp) impacted by social inflation have seen some upward pricing-power acceleration, largely due to worse-than-expected social inflation impacts, despite being the most positively impacted by higher interest rates.
How to attract and retain talent is another question platform management teams are trying to answer. An executive told me we’re in an environment of “hand-to-hand combat for producer talent.” How do you define, articulate, differentiate, and defend your value proposition?
Of course, the most commonly asked questions are centered on the U.S. Federal Reserve (Fed). We’ve clearly received a shift in tone from the Fed, but how will the expectation of lower rates impact M&A volumes and valuations? There are now over 30 financial sponsor-backed retail brokerage platforms in the U.S. The number of financial sponsors with the ability to pay, and without an investment in the space, is small and getting smaller – will the nature of capital in the sector be required to evolve? Will larger platforms be forced into the public markets or to merge? For years, participants in and observers of the brokerage sector have speculated that a wave of strategic-led “consolidation of the consolidators” would come. Are deals like Aon’s announced acquisition of NFP the catalyst?
No matter how you look at it, there are a few truths we know as it relates to the sector. First, the global economy needs insurance to function. Second, the world is only becoming more complex, and therefore, in need of the technical expertise of insurance brokers. Finally, the insurance brokerage sector remains as resilient as ever. 2024 will be an exciting year, no doubt.
1 The Hales Report, January 8, 2024
Themes That Will Shape the Insurance Distribution Market in 2024
Managing Director & Head, Insurance Distribution & Services Investment Banking
John Belle is a Managing Director in the Financial Institutions Group and Head of Insurance Distribution & Services Investment Banking at BMO Capital Markets. I…
Head, Financial Institutions
Adam Sinclair is Managing Director and Head of the Financial Institutions Group at BMO Capital Markets. In this role, he has responsibility for leading transaction …
John Belle is a Managing Director in the Financial Institutions Group and Head of Insurance Distribution & Services Investment Banking at BMO Capital Markets. I…
VIEW FULL PROFILEAdam Sinclair is Managing Director and Head of the Financial Institutions Group at BMO Capital Markets. In this role, he has responsibility for leading transaction …
VIEW FULL PROFILE- Minute Read
- Listen Stop
- Text Bigger | Text Smaller
Less than a month into the new year and 2024 is already distinguishing itself from the last. Inflation is moderating, the steady diet of interest rate hikes appears to be at an end, and the economy is seemingly on track for a soft landing (fingers crossed). Despite this shifting market paradigm, we expect many of the storylines that shaped the insurance and insurance distribution sector over the past 12 months to persist.
2023 – A Look Back
Despite the headwinds caused by the highest interest rate environment we’ve seen in the past two decades, 2023 marked another strong year for the insurance brokerage industry.
Inflation (pricing and social) and increased CAT activity supported a hard (but softening) market in the property and casualty (P&C) insurance space, leading to higher premiums and more restrictions on coverage. Last year, we saw several national carriers fully or partially exit markets like California, Florida and Louisiana, in turn, having a positive impact on organic growth for the sector. Organic growth held up better than expected, with many public and private brokers posting high single-digit organic growth and select platforms in the double digits.
Due to the high-interest rate environment, M&A activity in the distribution sector slowed significantly, especially when compared to 2021 highs. Since its 2021 peak, M&A activity by deal count fell by 48% in 20231; however, don’t mistake the muted market for lack of buyer interest. While there were fewer buyers at the table, those who remained were well-capitalized, motivated and willing to “stretch” for well-run platforms; said simply, management teams are “picking their spots.” Case in point, we closed the year out with a marquee M&A transaction in Aon’s announced acquisition of National Financial Partners for US$13.4 billion in December.2
As useful as it can be to identify trends predicting how valuations might evolve over the next 12 months, that won’t be easy in 2024. Just as the 2023 M&A valuation environment couldn’t be painted with a broad brush, we expect valuations will remain deal-specific this year.
The rate environment impacted both strategic and sponsor buyers’ expectations differently, namely impacting expectations around future M&A volumes and price, ability to pay and investment return hurdles. All the while, tuck-in valuations for well-run platforms certainly didn’t soften. We continue to see a premium being placed on platforms demonstrating market leadership, growing above market organically and able to execute on M&A.
2024 – A Look Ahead
As we look ahead into 2024, the buzzwords and phrases of 2023 will remain: organic growth, integration, specialty, margin enhancement (outside M&A) and value proposition. These will continue to be major themes to watch and underpin a number of key questions, including whether the sector will maintain its strong organic growth trajectory in what is arguably a once-in-a-lifetime hard market. If so, at what level of organic growth does margin expansion become more challenging?
Social and lawsuit inflation has emerged as a theme that could further impact the industry’s organic growth trajectory. Casualty lines (excluding work comp) impacted by social inflation have seen some upward pricing-power acceleration, largely due to worse-than-expected social inflation impacts, despite being the most positively impacted by higher interest rates.
How to attract and retain talent is another question platform management teams are trying to answer. An executive told me we’re in an environment of “hand-to-hand combat for producer talent.” How do you define, articulate, differentiate, and defend your value proposition?
Of course, the most commonly asked questions are centered on the U.S. Federal Reserve (Fed). We’ve clearly received a shift in tone from the Fed, but how will the expectation of lower rates impact M&A volumes and valuations? There are now over 30 financial sponsor-backed retail brokerage platforms in the U.S. The number of financial sponsors with the ability to pay, and without an investment in the space, is small and getting smaller – will the nature of capital in the sector be required to evolve? Will larger platforms be forced into the public markets or to merge? For years, participants in and observers of the brokerage sector have speculated that a wave of strategic-led “consolidation of the consolidators” would come. Are deals like Aon’s announced acquisition of NFP the catalyst?
No matter how you look at it, there are a few truths we know as it relates to the sector. First, the global economy needs insurance to function. Second, the world is only becoming more complex, and therefore, in need of the technical expertise of insurance brokers. Finally, the insurance brokerage sector remains as resilient as ever. 2024 will be an exciting year, no doubt.
1 The Hales Report, January 8, 2024
2024 Insurance Industry Outlook
PART 1
The Importance of the Insurance Industry
Alan Tannenbaum, Adam Sinclair November 29, 2023
Any business can offer services or produce the goods we need, but no other industry can sell peace of mind the way insurers do. Insurers ha…
PART 2
Insurance: 2023 Recap and Expectations for 2024
Tushar Virmani, Adam Sinclair November 29, 2023
Insurers thrive on predictability, yet there’s reason to believe the coming year could be anything but. The industry is facing signif…
PART 3
2024 Outlook: Equity Capital Market
Jeff Vickers, Adam Sinclair November 29, 2023
“In the short run, the market is a voting machine, but in the long run, it is a weighing machine” – Warren Buffet (1987).…
PART 5
2024 Leveraged Finance Outlook
Colin Bathgate, Adam Sinclair January 22, 2024
Early indicators support that 2024 could be a strong year for leveraged finance, with signs that the market is returning to life following …
PART 6
A Positive Outlook for the Insurance Industry
Alan Tannenbaum, Adam Sinclair February 08, 2024
At the end of January, I had the privilege of attending our second annual Insurance Distribution Forum, where we welcomed management teams …
PART 7
When Will the Fed Cut Rates?
Ian Lyngen, CFA, Adam Sinclair February 09, 2024
Between the U.S. Federal Reserve ending its tightening cycle to questions about America’s balance sheet and how that could affect the…
Conference
June 15, 2022 | Toronto
Email UsYou might also be interested in
Fireside Chat: Darryl White Talks AI, Banking Systems and Press Freedom