A major inflection happened recently around the merger & acquisition (M&A) valuations of specialty insurance firms vs. their retail counterparts. Historically, retail firms commanded higher valuations, given that the relationship with the insured trumped the one step removed nature of the intermediary – while specialty firms were valued at a (sometimes substantial) discount. The market is now seeing specialty firms command a premium, as the market and buyers are recognizing the strong value that specialty firms bring to the market.
This shift happened from 2020 to 2021 as M&A deal activity showed that specialty insurance firms increased their average valuation by 24%, according to MarshBerry data. This contrasts with retail firms increasing their average valuations by 9% during the same period. Valuations of specialty firms in the second half of 2022 are likely to remain robust, given projected firm demand from buyers for specialty firms.
Increase in Valuation for Specialty Insurance Companies
Here are three keys to why there will likely be a continued increase in demand and valuations for specialty insurance firms:
- Brokers are looking to experts for specialized risk needs. Customers are looking for more than just a broker who can complete an insurance purchase, they are demanding a knowledgeable advisor who provides solutions. This shift in customer preference has accelerated the need of firms to gain access to MGA (Managing General Agent) capabilities: unique solutions and sophisticated value-added services. This shift towards specialist capabilities has accelerated recently due to the current uncertainties affecting the insurance and economic environment, including:
- Losses in the cyber insurance market which have caused carriers to either reduce or eliminate capacity for this coverage resulting in much higher premium costs.
- Property coverage for hurricane-exposed risks (especially in Florida) continues to be in short supply while at the same time many Florida windstorm carriers could potentially be downgraded by ratings agency Demotech. On August 1, Demotech downgraded United Property & Casualty Insurance Company (UPC) and assigned the insurer a “Moderate” financial stability rating. However, Demotech is currently postponing the downgrades of over 20 other insurers after receiving questions from the Florida Office of Insurance Regulation. The potential of further downgrades have only further put strain on pricing in the Florida market.
- Insurance rates are rising in select categories. As rates continue to increase, some insureds will value the ability to place risk with a firm that has greater expertise around highly specialized or niche risks that may be harder to place with generalists. While overall insurance rate increases are moderating, premiums for commercial and property insurance continue to rise sharply in certain segments – including commercial cyber (+27.5%), umbrella (+10.5%), commercial property (+8.6%) and commercial auto (+5.9%).1 Furthermore, surplus lines premium rose 32.4% year-over-year (the highest rate of increase since 2009), to $31.4 billion in the first half of 2022, according to the U.S. Surplus Lines Service and Stamping Offices’ 2022 midyear report. There will likely be continued strength in the surplus lines market in the second half of 2022, as many carriers “true up” their actuarial projections for losses in the fourth quarter in preparation for their annual insurance filings. Many times, in a firming or “hard” market, this reconciliation of anticipated increased claims/losses results in higher premiums in the fourth quarter compared to other quarters. The Wholesale & Specialty Insurance Association (WSIA) also stated that “most predict dynamic economic factors will drive continued growth for the surplus lines market for the balance of 2022.”
- Technology and data are driving differentiation. The adoption of advanced technology has become table stakes for most brokerages (versus a “nice-to-have” mindset) in order to maintain personalized relationships. However, MGAs are able to adopt to new technologies quicker because of their smaller size and established distribution channels. And while Zoom and other collaborative technology tools have helped all firms bridge the gap in face-to-face interactions– the technology of data analytics and predictive modeling is where specialty firms can offer advanced insights and unique solutions to produce better outcomes.
MarshBerry sees the strength in M&A and valuations for specialty firms continuing in the second half of the year, as buyer interest remains high given the value specialty firms bring to the overall distribution sector.
If you have questions about Today’s ViewPoint or would like to learn more about recent activity in the specialty markets, please email or call Gerard Vecchio, Managing Director, at 860.916.4149.
1 https://www.ciab.com/wp-content/uploads/dlm_uploads/2022/05/Q1-2022-PC_FINAL.pdf
Investment banking services offered through MarshBerry Capital, LLC, Member FINRA and SIPC, and an affiliate of Marsh, Berry & Company, LLC, 28601 Chagrin Blvd, Suite 400, Woodmere, OH 44122 (440) 354-3230
