Opinion: Supercycle has fuelled ‘abusive’ returns for UK brokers – but has it also caused ‘complacency’?

By editor Katie Scott

Listening to John Wepler, chairman and chief executive at consultancy MarshBerry, speaking at this year’s Broker CEO Forum – hosted by Insurance Times on 14 November 2024 – it was impossible not to be enticed by his alluring tale of broking “Utopia”, where a 15-year supercycle has contributed to brokers becoming the “highest performing asset class of all asset classes”.

According to the Corporate Finance Institute, a supercycle refers to a period of strong economic growth, therefore leading to a sustained demand for commodities.

And UKGI is certainly one of these commodities, Wepler told broker bosses attending Lainston House last month, thanks to a broadened risk exposure base, continuing hard market conditions, challenges around specialty distribution and demand from equity and debt firms looking to back broking businesses and ride on their cash flow coat tails.

Wepler described brokers as “resilient” and “defensive in a down economy”, meaning they often produced “abusive returns” – supported by macroeconomic conditions.

For example, in the 12 months to 30 June 2024, Wepler pointed to both private and publicly owned brokers seeing their valuations increase, with firms’ organic growth sitting at an average of 10.5% and margins amounting to 20% on average.

He said: “Valuations have continued to skyrocket. Public brokers were worth nine times earnings before interest, taxes, depreciation and amortisation (ebitda) in 2009 and it’s scaled up consistently to 20 times ebitda for the 12 months ending Q3 in 2024.

“[This] significant growth in the valuation of public brokers has dribbled down into the valuation of privately owned brokers and it’s justified the thesis for private equity [involvement].”

Amid this rosy financial scene, however, Wepler issued a warning to broker delegates. He noted that average broker organic growth could drop from 10.5% to 2.7% “if you strip out [the] rate growth [and] exposure-based growth” of the current supercycle.

He continued: “It feels like you are living in Utopia. However, the concern I have is you’re really living in a supercycle and will [this] supercycle come to an end? It sure feels like the wind has been at our backs for 15 years in a row. It does make you wonder if it will last forever.

“That wind at the back of the average broker has created a lot of complacency and an expectation that the best times in the history of the world [will] continue to last forever.

“So, [I] encourage you to think about how you’re going to position your firm for long-term growth because the supercycle is under pressure.”

Wise words indeed as we approach the mentality shift of a new year and January vibes of turning over a new leaf.