Insurance Thought Leadership
I'm interested in the report you did on M&A, especially the part on agencies and brokerages. Could you outline the basic outlook for this year?
Mark Friedman
I'm glad you're focusing on agents and brokers, because that’s a lot more straightforward than other parts of the industry, and that’s where most of the activity is. The theme broadly in P&C deals is that 2025 is going to be a year of rebound – though we’ve already been at pretty elevated levels with insurance brokerages, both in terms of deal volumes and deal values.
Insurance brokerage distribution remains a really stable business, generating predictable cash flow and requiring little working capital, which is why private equity loves it. They're reminded of those qualities in down markets, where other more cyclical businesses have stresses on their business model, be they luxury goods, restaurants, or hospitality. Other sectors are a lot more cyclical, whereas insurance is only really affected by two macroeconomic factors: employment and housing. When you employ people, there's a lot of coverage, and with housing comes a lot of insurance.
We haven't really seen a significant jump in unemployment. We have seen economic growth slow, but as a result of inflation over the last couple years insurance rates have gone up quite a bit. So brokers are not only retaining their business, but because premium rates are largely rising, we're actually seeing significant growth.
In 2024, we saw a number of corporate buyers do sizable acquisitions, and at the beginning of 2025 we're starting to see that, as well. That is a function of interest rates. With interest rates having come down by about 100 basis points over the course of 2024, we're definitely seeing a lot more interest on the part of private equity.
Separately, but very much related, there is a backlog of exits. There are a lot of these broker platforms that have grown exponentially through consolidation over the last couple of years, owned by private equity. Their time is coming due for an exit, and there's no lack of buyer demand.
Valuations are going to remain high, and we expect to see volumes continue. We're just into the new year, and we've already seen a number of pretty sizable transactions announced. It's already a very active market in 2025.
Insurance Thought Leadership
Do you think the new administration will reduce the focus on antitrust issues?
Mark Friedman
It could be. But I would say the impact is marginal, because most of the deals that are getting done are not ones that would otherwise have been challenged. We saw a lot of mega deals in 2021 under the old administration that were not challenged. So while a business-friendly administration is definitely very helpful, I don't think we're going to see floodgates open.
The change does add to the competitive dynamics on the buy side, where some of those larger players that were maybe a bit worried that a sizable deal may get scrutiny from an antitrust perspective will have more confidence. They'll be more inclined to jump in and be willing to buy.
Insurance Thought Leadership
For some years now, agencies and brokerages have had to invest more in technology, and larger companies can do this more effectively. With the recent burst of AI activity, is the need for technological progress a factor in the elevated M&A activity, as well?
Mark Friedman
Yes, but there are two factors at play here. The brokers that have done a nice job streamlining operations and integrating their businesses, particularly their acquisitions, are definitely seeing better margins, more efficient businesses, more profitable businesses, and they get higher valuations. But as folks in this industry are well aware, you can't really upset the apple cart too much. Integration is good, but you can't buy a brokerage and just tell them they're going to start writing business very differently. You're not going to change how they interact with people. They're fussy about how they do business. So there’s a fine balance.
To get to your point about AI, there's a lot of opportunity for revenue synergies and cross-selling opportunities if brokers do a better job leveraging their data. That is going to be the next big differentiator, and scale matters. You get better commission rates if you've got better volumes, so that does have some impact. But a lot of brokers already have that and are getting the top-tier overrides.
Those that are able to leverage AI will have an advantage -- and we are seeing some products come to market already where some of these large AI platforms are focused on it because they see the opportunity in the brokerage space. There's AI being leveraged in underwriting and claims, but as it relates to brokers, I think the single biggest opportunity is harnessing the data they have and the ability to leverage that data to identify new opportunities for revenue.
Insurance Thought Leadership
In a conversation about M&A a few years ago, I was told that, despite a lot of activity, the number of agents and brokers has remained stable. New businesses form as old ones are consolidated. Are you seeing a similar trend, or is there an absolute consolidation happening in the industry?
Mark Friedman
It's an interesting perspective. The average age of an insurance broker in the U.S. continues to creep up, but we’re seeing them consolidating under umbrellas. What we're also seeing, in terms of startups, is a lot more activity on the wholesale side, meaning MGAs and MGUs.
If you look at the insurance industry as a whole, it is largely a zero-sum game, meaning you're not going to find under-penetrated markets in the U.S. If you go out to India, for example, various statistics suggest that 70% of India is not banked or insured, so you've got massive opportunity for organic growth in the insurance sector there. There are new products in the U.S. market. For example, rep and warranty insurance was 10% penetrated 10 years ago; it's now somewhere between 60% and 80% penetrated. Cyber insurance is another real growth area. On the flip side, there are areas that are no longer as necessary or popular, like financial guaranty insurance.
In general, there is natural growth. There's growth in premium rates, but volume growth is in single digits. What is changing in the P&C space is that we used to have one-stop shops where insurance companies wrote every product. We're seeing a lot more insurance companies looking at their portfolios and saying, "We haven't figured out how to write this stuff profitably. We're going to exit." When they exit, they're either going to stop writing completely, or they're going to outsource the underwriting. They're going to have MGAs that are just focused on this specific product, and they'll hand the pen to them.
We are seeing a significant number of MGAs pop up. This is just a shift from traditional brokers to MGAs or MGUs. There may be two brokers involved because you may have a referring broker. A lot of the large guys don't have the MGAs, though they'll leverage them. So it's the same policy, it's just being underwritten differently. But with MGAs comes a need for fronting carriers and reinsurance brokerage.
There is definitely a changing mix in how the business is written, and that's having an impact on brokers. For example, most of the large brokers are focused on growing their MGA platforms because they see MGAs as a threat to the traditional brokerage model.
Insurance Thought Leadership
Are there any other trends you are observing in the marketplace that might interest agents and brokers?
Mark Friedman
People frequently ask about online, direct-to-consumer models, but no one has quite figured out how to make that work economically. The customer acquisition cost is right in line with any insurance company that uses agency distribution.
That said, technology evolves. As insured consumers become more technologically and digitally sophisticated, we could start to see more of a shift toward digital brokerage platforms or direct-to-consumer digital marketing. But what’s happening is similar to banking -- despite predictions that brick-and-mortar banking would disappear, you still see banks opening branches. The same applies to the brokerage space. Most insurance is still very much a broker-consumer relationship.
Insurance Thought Leadership
Thanks so much, Mark.
