Moody’s forecasts a stable 2024 outlook for the insurance brokerage sector, supported by constructive global economic growth, a favorable commercial property and casualty (P&C) rate environment and stable EBITDA margins.
According to Moody’s report, organic growth will remain in the mid-single digits or higher as economic growth stabilizes and P&C rates rise modestly.
Analysts expect G20 GDP growth to stabilize at a modestly lower level in 2024 than in 2022 and 2023 as the global economy transitions to post-pandemic equilibrium.
The forecast includes 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 to rise to an average of 3.9% in 2024 from 3.6% in 2023 and that the US Federal Reserve will cut the federal funds rate by a cumulative 100 basis points in 2024 .to 4.25%-4.50%.
EU GDP is projected to grow gradually from 0.5% in 2023 to 0.8% in 2024 and 1.6% in 2025, reflecting rising real wages, falling inflation, falling interest rates and improving of the credit conditions.
According to Moody’s, the European Central Bank is also likely to start cutting rates in 2024 and highlighted geopolitical risks and inflation as potential threats to the outlook for this year.
Favorable P&C pricing across most lines of business, further growth in insurance exposures, strong customer retention and new business generation will also support organic revenue growth in the mid-single digits or higher in 2024, according to the report.
In 2024, broker EBITDA margins will remain stable through strong organic revenue growth and good cost control.
“Brokers will maintain solid EBITDA margins through 2024 and beyond through strong organic revenue growth and good cost control. Interest coverage for investment grade and speculative grade brokers has declined slightly over the past few years due to higher market interest rates,” Moody’s said.
The report also revealed that higher borrowing costs and persistently high purchase ratios will slow the pace of acquisitions. The analysts said: “Despite the slowdown in transaction activity, insurance brokers will continue to make strategic platforms and acquisitions to enhance their product capabilities, geographic reach and economies of scale.
Inheritance of ownership/management as well as access to industry/product specialties, better data and analytics and more favorable terms from insurance carriers are some of the reasons that have prompted brokers to sell, the report revealed.
Another factor contributing to the robust outlook for 2024 is that insurance brokers tapped debt markets earlier in the year and increased 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 debt markets in recent years of rising Treasury rates and variable credit spreads.
“Higher Treasury rates, partially offset by narrowing credit spreads, led to slightly 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 investments in technology, data and analytics, and cybersecurity — used primarily to improve the quality and efficiency of their operations, especially interactions with insurance buyers and carriers — will remain a focus in 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.
As the commercialization of generative artificial intelligence grows, Moody’s explained that brokers are exploring its potential to increase operational efficiency. Analysts said early adopters could gain a competitive advantage if these processes were 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.
