S&P assigns stable view to global insurance broking sector

By Rebecca Delaney

Jan 28 - (The Insurer) - S&P Global Ratings has assigned a stable sector view for insurance brokers in 2025, underpinned by expectations of robust broker revenue and earnings growth for the year ahead despite moderating tailwinds.

The stable outlook is based on the expectation that organic growth rates will remain in the mid-single digits or better, with margins holding steady or slightly improving as a result of internal efficiency initiatives.

S&P added that net premiums in 2024 and 2025 are expected to increase by 8-9 percent, outpacing S&P's nominal GDP growth expectations as insurers respond to elevated claims costs with rate increases.

While this marks a deceleration from rate increases seen in 2021-23, consistently favourable P&C premium growth trends will "bode well" for broker organic growth in 2025.

In addition, growth in E&S premiums and MGA-produced premiums are expected to continue to outperform the P&C market owing to increased demand for bespoke solutions among brokers with material wholesale, MGA or other specialty operations.

"While stabilising insurance rates and subdued inflation will weigh on organic growth relative to the highs of the past few years, most of our rated brokers will continue to capture share in an increasingly sophisticated market," said S&P.

The report added that broker margins have returned to "growth mode" (around 25-35 percent) after declining modestly in 2021-23 on the back of wage inflation, normalisation in travel and expenses post-pandemic, and increased investment in internal growth initiatives.

S&P said it believes there is room for further scale and technology-driven margin gains over time, also bolstered by fairly steady commission rates and highly variable cost structure.

In terms of inorganic growth, M&A activity is projected to remain robust despite elevated valuations amid a continued fragmented space and strong buyer demand.

S&P highlighted three "blockbuster" deals in the past year – Aon-NFP, Marsh-McGriff, and Gallagher-AssuredPartners – as key examples of the attractiveness of the middle-market space, with the deals all featuring investment-grade strategic buyers of speculative-grade PE-backed middle market brokers.

According to S&P, following consolidation activity, the bar for entry to become a top-10 US broker has increased threefold in the past decade to $2.7bn. However, the top 10's share of total revenue among the top 100 brokers declined to 66 percent in 2023 from 75 percent in 2011.

The report noted that risks related to M&A may form long-term concerns for the sector, including integration shortfalls, customer attrition challenges and synergy miscalculations.

S&P also warned that "aggressive" financial leverage remains a key rating constraint, although gradually reducing interest rates should improve the "thin coverage cushions" relative to its downgrade triggers.

Downgrade activity was described as "generally modest" compared to many other corporate sectors, in part driven by greater stability in underlying insurance purchase tends compared to other discretionary products and services.

The report concluded that long-term strengths for the sector include limited concentration among clients, carriers and producers, as well as share gains by most rated players through successful organic and inorganic growth activity. Long-term sector risks include organic growth sensitivities to insurance pricing and macro factors (such as GDP, inflation and payroll), and intangible asset and people-related risks linked to talent retention and reputation.