Global insurance broker’s outlook stable for 2024 on strong organic growth: Moody’s
Moody’s predicts a 2024 stable outlook for the insurance brokerage sector, underpinned by constructive global economic growth, a favourable commercial property & casualty (P&C) rate environment, and stable EBITDA margins.
According to Moody’s report, organic growth is to remain in the mid-single digits or higher as economic growth stabilises and P&C rate increases moderate.
Analysts expect GDP growth for the G-20 economies to stabilise at a modestly lower level in 2024 compared to 2022 and 2023 as the global economy transitions to a post-pandemic equilibrium.
The forecast incorporates a gradual decline in US GDP growth from 2.5% in 2023 to 2.1% in 2024 and 1.8% in 2025, as consumer spending and wage growth slow.
Experts also expect US unemployment will rise to an average of 3.9% in 2024 from 3.6% in 2023, and that the US Federal Reserve will lower the federal funds rate by a cumulative 100 basis points during 2024 to 4.25%-4.50%.
EU GDP is forecasted to increase gradually, from 0.5% in 2023 to 0.8% in 2024 and 1.6% in 2025, reflecting real wage growth, diminishing inflation, falling interest rates and improving credit conditions.
According to Moody’s, the European Central Bank will likely also start lowering rates in 2024, and highlighted geopolitical risks and inflation linger as potential threats to this year’s outlook.
Favourable P&C pricing in most lines of business, further growth in insurable exposures, strong client retention and new business generation will also support organic revenue growth in the mid-single digits or higher in 2024, according to the report.
2024 will also see brokers’ EBITDA margins hold steady through strong organic revenue growth and good expense controls.
“Brokers will maintain solid EBITDA margins through 2024 and beyond through strong organic revenue growth and good expense controls. Interest coverage for investment-grade and speculative-grade brokers declined slightly over the past couple of years because of higher market interest rates,” said Moody’s.
The report also revealed that higher borrowing costs and persistently high purchase multiples will slow the pace of acquisitions. Analysts stated: “Despite a slowdown in transaction activity, insurance brokers will continue to make strategic platform and tuck-in acquisitions to enhance their product capabilities, geographic reach and economies of scale.
Ownership/management succession as well as access to industry/product specialties, better data and analytics, and more favourable terms from insurance carriers, are some causes that have prompted brokers to sell, the report revealed.
Another factor contributing to a stable outlook for 2024 is that insurance brokers have tapped debt markets early in the year and pushed maturities.
Analysts explained: “The aggregate debt of rated brokers has grown over the past decade to about $125 billion as of March 2024. Brokers have had good access to the debt markets through the recent years of rising Treasury rates and fluctuating credit spreads.
“Higher Treasury rates partly offset by declining credit spreads have led to somewhat higher but manageable borrowing costs on average. Most insurance brokers have refinanced their debt and extended maturities to 2027 and beyond.”
Finally, insurance brokers’ regular investment in technology, data and analytics and cybersecurity – mainly used to enhance the quality and efficiency of their operations, particularly interactions with insurance buyers and carriers – will remain in focus this 2024, according to the report.
Most of them are investing in digitization, machine learning and robotics, and shifting their businesses to the cloud to improve data quality and accessibility.
With the rise in commercialization of generative AI, Moody’s explained, brokers are exploring its potential to boost operating efficiency. Analysts stated that early adopters could gain a competitive edge if these processes are deeply integrated into risk management practices.
Among these practices, cyber risk management is a priority for management teams to protect both existing and acquired operations, the report highlighted.
