Insurance brokers have stepped up their acquisition pace in the second half of 2020 after a pause in the second quarter related to the coronavirus and the steep economic decline, according to a report published by Moody’s Investors Service.
Indeed, private equity sponsors and low borrowing rates will drive further broker consolidation, which has shown fairly steady growth over the past decade, including transactions through mid-November 2020.
U.S. deal numbers, for example, were 296 in 2011; 354 in 2012; 254 in 2013; 382 in 2014; 497 in 2015; 473 in 2016; 593 in 2017; 606 in 2018; 596 in 2019 and 447 thus far in 2020, said Moody’s, listing statistics provided by SNL Financial (which is S&P’s market intelligence unit).
Most insurance broker acquisitions involve mid-sized brokers purchasing smaller platforms or tuck-in brokers, said the report, noting, however that the sector is still fragmented with many thousands of insurance brokerages and agencies across the U.S. (Editor’s note: tuck-in acquisitions are completely absorbed by the acquiring broker).
Further, Moody’s said, many of the top 20 brokers have attained their size through a combination of organic growth and acquisitions.
“The buyers seek to expand their geographic reach, product capabilities, cost efficiencies and market clout with insurance carriers,” said the ratings agency. “Sellers seek some combination of ownership/management transition, access to product expertise, larger budget for technology spending, and better terms from insurance carriers.”
M&A Driven by Private Equity Sponsors
Moody’s said private equity companies have driven broker transaction volumes over the past decade because PE firms appreciate the good credit characteristics of brokers, readily available debt financing and low interest rates.
The share of transactions backed by private equity sponsors has increased from about one-fourth a decade ago to about 70% today, said Moody’s, quoting Optis Partners, the M&A specialist that tracks broker acquisitions.
“The four most acquisitive brokers in terms of deal count through the first nine months of 2020 were Acrisure, BroadStreet Partners, Hub International Ltd. and AssuredPartners,” said the Moody’s report.
“With easy access to debt financing, private equity sponsors will keep upward pressure on broker purchase multiples,” said Moody’s.
Consolidation at the Top
The largest global brokers are also consolidating, said Moody’s, citing the April 2019 purchase of UK-based Jardine Lloyd Thompson by Marsh & McLennan for $5.6 billion, which boosted MMC’s annualized revenue by about 13%. The other major transaction is the merger of Aon and Willis Towers Watson, announced in March 2020, approved by shareholders in August and expected to be completed in the first half of 2021.
The Aon-WTC deal will create the world’s largest insurance broker, with pro forma revenue of about $20 billion, said Moody’s.
Outlook in 2021 for Global Brokers
Moody’s said the 2021 outlook for global insurance brokers is stable, which reflects the nascent economic recovery, rising property and casualty rates and the industry’s sound business model.
“Insurance brokers can navigate the economic uncertainty based on their good value proposition, partly variable cost structure, low capital expenditures and healthy cash flow,” said the report.
“The brokers implemented cost-saving measures as the coronavirus pandemic took hold. They shifted to remote work, reduced discretionary spending, postponed nonessential capital expenditures, and slowed the pace of acquisitions, helping stabilize their earnings and free cash flow,” said Moody’s Vice President Bruce Ballentine, in a statement accompanying the report.
The Moody’s outlook report, published on Nov. 18, 2020, is titled: “2021 outlook stable as brokers’ EBITDA and cash flow withstand economic strains.”
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