The securities market is experiencing a period of sustained growth in revenue, profitability and shareholder value, driven by favorable macroeconomic conditions. M&A activity is thriving due to easy access to cheap capital for strong cash flow businesses, while organic growth is fueled by a hardening interest rate environment and increased inflationary exposure. Shareholder value, including financial sponsors and employees, is also supported by liquid capital markets and historically high multiples, symbolized by record deal volume. However, these tailwinds are fading as market conditions change.
Soaring interest rates, record high valuations and tightening access to capital have created significant headwinds for M&A activity. Deal flow will fall by around 30% in the first eight months of 2024 Compared to the same period in 2023, M&A remains an important strategy for brokers to remain competitive in servicing clients and maintain negotiating power with insurers. Similarly, organic growth for brokers has been driven primarily by fee increases over the past few years.Annual return averages 8-9%—It is beginning to shrink as P&C rate increases moderate in some lines of business. Moreover, the average revenues of the top 100 private equity-owned brokers and agents are It has almost doubled in the past four years This indicates that for the largest aggregators, creating liquidity events will require more capital than ever before.
As macroeconomic tailwinds begin to fade, a key question emerges: How can insurance brokers evolve their strategies to usher in the next era of profitable growth?
There are three long-term levers management is considering to achieve and sustain profitable growth.
- Promoting greater standardization and integration
Brokerages that operate in a highly federated model, or function as holding companies rather than operating companies, often allow their underlying agents to operate independently. This approach can provide flexibility and encourage entrepreneurship, but it can also lead to operational inconsistencies, disconnected technology systems, disparate data sources, and governance and control challenges. As the market evolves, brokerages are increasingly looking to standardize how they work and introduce greater integration into their operating models. This transition involves adopting global redesigns to establish uniform definitions and rethinking how processes are managed across the enterprise to enhance quality and control.
Additionally, process standardization and agency consolidation must be underpinned by an integrated technology ecosystem that spans business segments and functional groups to enable traceable data flows across the organization and create a single source of truth for managing the business. Tighter integration and standardization are the foundation for improved efficiency and the ability to generate better insights to drive growth.
- Increased corporate leverage and sustained profit margins: Standard operating procedures and tighter integrations allow brokers to better consolidate non-customer-facing activities. Shifting back-office functions such as accounting, IT and HR out of agent offices increases efficiency, allowing for greater focus on sales and service efforts.
- Optimized Procurement and Overhead: Acquired agencies typically come with numerous technology licenses and third-party vendors. A high degree of consolidation allows you to consolidate fragmented vendor and license agreements and capture economies of scale in your target vendor list. Additionally, efforts to drive operational standardization create opportunities to standardize discretionary spend, including reducing side technology projects and solution workarounds.
- Data-driven decision-making and improved accountability: Accurate and available data allows operators to govern the business based on a clear set of insights, with a clear understanding of what, how and why each insight is measured. This includes how frontline colleagues who run the bulk of the business impact the company’s performance. The shift to fact-based decision-making provides focus and allows leaders to take calculated actions with measurable results, reducing the need for broad, ill-defined moves that often negatively impact the bottom line. It also creates clear accountability for the information that needs to be collected in a consistent way, empowering the company to leverage insights that serve the company and the field.
- Activating new sources of growth:
Tightening M&A terms and the fading tailwinds of rising renewal prices mean brokers need to think strategically about where to invest in growth. Driving organic growth through data is essential, and strategies and tools should be put in place, including: Generative AI Gaining deeper insight into revenue generating roles (e.g., leveraging Gen AI to identify cross-sell/up-sell opportunities across a broker’s transactions); prioritizing investments in new capabilities to activate synergistic revenue streams (e.g., focusing on M&A that brings new products or geographic reach), and expanding scale or exploring vertical integration opportunities within existing markets should be key areas of focus going forward. We will also see brokers differentiate through industry niches and specializations and pair these with MGA or affinity partnerships to become the go-to distributors for specific verticals. Finally, as the E&S market continues to grow, there is a significant opportunity for brokers to capture multiple revenue streams and expand their reach to include wholesale business, especially in challenging exposure areas and coverage lines.
- Invest in foundational capabilities and new talent:
As brokerages experience increased levels of consolidation, the focus is shifting from agencies led solely by talented (sales) entrepreneurs to agencies with strong operators. This change requires a different leadership profile that can manage operators and lead the transformation required to meet increasing market pressures while continuing to deliver shareholder value (standardizing integration, enhancing technology, developing and attracting new talent, etc.). Such skillsets are relatively new to brokerage leadership, and with a federated model made up of corporate and regional structures and underlying agencies, it is difficult to appoint executives to lead these transformations. The ability to influence and drive transformation at all layers is a unique skillset.
4 short-term wins to get you started
While a long-term response to the pressures facing the securities industry will require focus and coordination from the C-suite, we recommend four initial steps that brokerage leaders can take first.
- Identify priority areas for standardization and centralization: For more fragmented brokerages, start with standardizing Level 1 data entry processes (e.g., AMS Standard Operating Procedures), begin migration to common technology (e.g., one agency management system), and work toward centralizing common, low-risk activities to demonstrate success and gain buy-in for future centralization (e.g., vendor payables, data processing, policy certification, claims processing).
- Reassessing the M&A agenda: Update companies’ M&A appetite to be more selective. Each deal should support long-term growth plans and complement core businesses. Consider divesting non-core business lines to generate new sources of capital and allow companies to focus on efforts to become operating companies rather than holding companies.
- Evaluate gaps in your business reporting and data: Management can produce financial summaries and operational reports, but AMS and accounting systems are fragmented, so meeting these basic reporting requirements often requires extensive data cleansing. Understand the organization’s entire technology/system landscape (e.g. how AMS instances connect to accounting/financial sources of truth) and operating model to map data flows and identify opportunities to improve data hygiene, integrity, and availability. We find that brokers are prioritizing standard ways of producing financial and operational management reports first to lay the foundation for deeper insights.
- Identify talent gaps to prioritize: While the decisions to act on the levers outlined above are highly strategic and likely necessary to help your brokerage withstand market shifts, executing on these decisions will require talent not typically found in brokerages today. To chart a path forward, identify your core talent gaps (e.g., transformational leadership, business operators, data expertise, industry specialization) and develop a plan to acquire this talent.
We have been and will continue to be active in helping brokerages navigate this changing environment. Heather Sullivan, Gina Pappas, Robert Heldor Bob Vescio If you would like to discuss further.
