View this article online: https://www.insurancejournal.com/news/national/2018/03/22/484083.htm
The 2018 outlook for insurance brokers is stable, reflecting good product demand, low capital requirements, significant variable costs, and healthy EBITDA margins and cash flows, which will continue to attract investors, including private equity firms, Moody’s Investors Service says in a new report.
In 2018, Moody’s expects brokers to generate organic revenue growth in the low-to-mid-single digits owing to steady economic growth in the U.S. and globally along with stable-to-rising U.S. property/casualty insurance rates.
Moody’s believes U.S. brokers will likely match or exceed the median organic growth of about four percent achieved in 2016-17.
“Virtually all the brokers we rate pursue acquisitions to complement organic growth,” Truman says. “The goals for buyers include greater operating efficiencies, expanded relationships with insurance carriers, and access to new capabilities and geographies. For sellers, the goals include tapping into the resources of a larger firm, and perhaps facilitating the retirement or divestiture of a founder.”
Purchase multiples will remain high in the brokerage sector as private equity firms and managers of private brokers continue using debt to help fund acquisitions. The average purchase multiple in the U.S. increased to about 11x EBITDA in 2017 from about 8x EBITDA in 2010, driven by low borrowing rates and high private equity involvement. Highly acquisitive brokers face potential missteps in their integration efforts, which could lead to asset write-downs or divestitures of certain operations, Moody’s anaylsts said.
The new U.S. tax law is generally good for U.S.-based investment-grade brokers, with the lower corporate tax rate (to 21 percent from 35 percent) boosting net profits and operating cash flows. However, Moody’s added, for highly leveraged private brokers, the new tax law will make some worse off in certain years mainly because of limits on the deductibility of interest expense.
Moody’s noted that leading brokers are investing in technology to promote efficiency, service, analytics and innovation. Broker practices vary, however, with many operating multiple legacy systems that are inefficient and lack real time data.