Federal Reserve Rate Cut: What It Means for Insurance Brokerage M&A

On September 18, 2024, the Federal Reserve cut interest rates by 50bps, which was a larger cut than many were forecasting. This decrease in interest rates will reduce the go-forward borrowing costs for leveraged insurance brokerage investors.

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In August, Sica | Fletcher published a whitepaper indicating that despite interest rates rising substantially from early 2021 to Q1-2024, valuations for insurance brokerages have increased. This reflects the increased number of acquirers with capital for insurance brokerages and the resultant increased demand for acquisitions.

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Since Q4-2022, the cost of debt has exceeded the expected return for insurance brokerages, resulting in a negative spread. Following the recent Federal Reserve action, while the spread is still negative, the gap is closing. If rates continue to decrease, the negative spread will revert to positive, which should alleviate the downward pressure on insurance valuations.