M&A becoming essential for insurance brokers as organic growth slows: Evercore ISI

Evercore ISI, an independent investment banking advisory and research firm, highlights a significant shift in the insurance brokerage industry.

As organic growth begins to slow due to broader economic factors, mergers and acquisitions (M&A) are emerging as a critical strategy for brokers aiming to sustain and enhance their growth trajectories.

Their analysis reveals that while economic growth and commercial pricing are expected to moderate over the next few years, strategic acquisitions offer brokers substantial opportunities to increase revenues and shareholder value.

Evercore points out that nominal GDP growth is projected to decelerate from approximately 5% in 2024 to around 4% in 2025 and 2026.

At the same time, increases in commercial pricing, which have been driving growth, are anticipated to decline from mid-single-digit gains to low-single-digit growth.

These macroeconomic conditions suggest that insurance brokers should expect organic growth to settle near 5% annually going forward, a reduction from the 6% to 9% growth rates observed between 2022 and 2024.

Evercore emphasises that this moderation represents a normalisation for an industry that has recently benefited from stronger growth trends.

With this slowdown in organic expansion, Evercore identifies M&A as a key lever for growth and value creation. They note that private equity (PE)-backed brokers, now estimated to represent about 35% of the US brokerage market, are becoming increasingly attractive acquisition targets.

PE firms are actively seeking exits through sales, IPOs, or portfolio restructurings, which presents buying opportunities for larger brokerage firms.

Smaller and mid-sized PE-backed brokers, collectively generating roughly $8 billion in revenue and representing about 10% of the market, are particularly well-positioned for bolt-on acquisitions.

Evercore also highlights that independent brokers outside the top 100 firms, contributing around $20 billion in revenues or 25% of the market, add another layer of potential targets for consolidation.

Deal valuations continue to support accretive acquisitions, with recent transactions pricing targets at roughly 14 to 15 times enterprise value to EBITDA. This valuation range generally allows buyers to increase earnings post-acquisition.

Evercore observes that established brokers such as Arthur J. Gallagher (AJG), Marsh McLennan (MMC), Aon, and Willis Towers Watson (WTW) are well-equipped to integrate acquisitions given their robust platforms and previous M&A experience. AJG and WTW, in particular, hold considerable excess capital, providing significant financial capacity to pursue deals.

While larger acquisitions may range between $1 billion and $3 billion in enterprise value, Evercore ISI expects the majority of M&A activity to involve smaller, bolt-on deals. These transactions could add one to three percentage points annually to revenue growth, helping brokers push total growth into the 7% to 9% range when combined with organic growth.

Evercore further notes that the brokerage sector has recently underperformed the broader market, resulting in more attractive valuations that now reflect a more normalised growth outlook.

This undervaluation, coupled with the revenue enhancement expected from ongoing inorganic growth, indicates meaningful upside potential for brokerage stocks. As investors increasingly recognise the dual contributions of organic growth and M&A activity, Evercore anticipates a positive re-rating of these stocks.

Looking ahead, Evercore underscores that the insurance brokerage industry remains highly fragmented, with roughly 12% of the market outside the top 100 firms and another 10% to 15% made up of smaller PE-backed or independent brokers.

This fragmentation presents a sustained runway for consolidation, which Evercore believes will continue to drive steady revenue growth in the years to come. The firm expects M&A to become an increasingly important factor in broker valuations, reflecting the combined impact of strategic hiring and acquisitions on overall revenue performance.

In summary, Evercore’s analysis makes clear that organic growth for insurance brokers is set to moderate amid slower GDP growth and softer commercial pricing.

As a result, M&A—particularly involving PE-backed brokers—is poised to play a critical role in driving revenue expansion and stock performance.

With attractive deal valuations, well-capitalised top brokers, and ample consolidation opportunities in a fragmented market, Evercore advises investors to weigh both organic and inorganic growth when evaluating brokerage stocks for the future.

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