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After Showcasing Resiliency During An Unprecedented Year, Global Insurance Brokers And Servicers Enter 2021 On Sound Footing

COMMENTS

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NEWS

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Hurricane Ida Is Not Expected To Result In Rating Actions On U.S. Property/Casualty Insurers And Reinsurers

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Commercial Auto Insurers Face A Long Haul To Profitability As The U.S. Economy Reopens And Confronts Shortages


After Showcasing Resiliency During An Unprecedented Year, Global Insurance Brokers And Servicers Enter 2021 On Sound Footing

S&P Global Ratings' outlook on the global insurance services sector is stable, reflecting an improving global economy on top of resiliency demonstrated thus far throughout the pandemic.

Insurance services companies are a subset within the corporate business and consumer services sector. These companies mainly provide business services to the insurance sector, enabling exposure to a large and well-established marketplace with little to no exposure to underlying insurance risk. Insurance brokers make up the largest group among the insurance services companies we rate, which also include health insurance and cost-containment servicers, claims managers, and warranty administrators.

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Rating And Outlook Overview: The Decline Reverses

We publicly rate 45 insurance services companies, following a growing trend of private-equity buyouts supported by syndicated financing. These buyers, along with the more recent addition of pension fund participants, continue to be enticed by key sector attributes, including growth and retention, predictable cash flows, and limited capital expenditure requirements.

Unlike the insurance carrier sector, which is primarily investment grade (rated 'BBB-' or higher), insurance services companies are mostly speculative grade (rated 'BB+' or lower), predominantly in the 'B' rating category. Insurance services companies generally operate with high leverage and relatively weak credit-protection measures, mainly due to financial-sponsor ownership and aggressive financial policies related to capital structure.

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A significant majority (89%) of the insurance services companies we rate entered 2020 on sound footing and with a stable outlook, with just 9% with a negative outlook and 2% a positive outlook for reasons idiosyncratic to each issuer. However, we took 12 negative rating actions across the sector during March and April primarily due to pandemic-related concerns, with the actions predominantly limited to outlook changes. As a result, we had a substantial negative bias to our ratings at the early outset of COVID-19, with 41% of the portfolio with a negative outlook by April 2020. Actions were uneven across subsectors, with the fewest actions on brokers and the most actions on health servicers, highlighting our view of the pandemic's potential varying impact across a diverse portfolio set.

Rating actions have had a positive bias across the board since late summer, as second- and third-quarter results exceeded our expectations for many issuers, resulting in the percentage of negative outlooks dropping down to 13%. Based on our expectation of performance momentum across the subsectors and an improving global economic outlook, we expect further outlook revisions to stable from negative will likely occur in 2021.

Rating changes were highly modest this year. We downgraded one issuer (auto warranty administrator APCO) on COVID-19-related concerns and have since upgraded that issuer to our pre-COVID-19 rating. We downgraded one additional issuer in the portfolio (insurance broker and travel operator Saga plc) on COVID-19-related pressures, but the downgrade was in relation to the travel segment and not the insurance services segment, which remained resilient. Aside from the COVID-19-related rating changes, we downgraded two issuers (health servicer Keystone Acquisition Corp. and French insurance broker Siaci Saint Honore) on underperformance largely not related to the pandemic and upgraded one issuer (home warranty administrator FrontDoor) before the pandemic on credit metrics improvement. This trend of limited rating changes, in some respects, speaks to the sector's relative stability compared with many other sectors within business services and varying other corporate sectors more broadly that experienced substantially greater rating volatility this year.

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Underpinning rating stability, we continue to view liquidity as generally sound across the sector, stemming from generally limited working capital and capital expenditure requirements, a favorable debt maturity schedule, and limited restrictive financial covenants, notable for companies predominantly rated in the 'B' category with high debt loads. Another key factor that has supported ratings across the sector is the high level of cost variability, which has substantially shielded margin despite top-line declines that have varied across subsectors. Over the next 12 months, we expect credit quality to hold as most subsectors' revenues continue to largely recover.

Economic Outlook: Slow Climb Out Of The Hole

Our economists predict global economic expansion to resume in 2021, with growth across all the major economies following declines across all of them except China expected for full-year 2020. Globally, our base-case forecast foresees real GDP having declined 4% in 2020, then rising to 5% in 2021 and moderating to growth of 4% in 2022.

Table 1

GDP Growth And Recovery Forecasts
--Real GDP growth rates (%)-- --Recovery to end-2019 level--
2019 2020f 2021f 2022f 2023f GDP Unemployment
U.S. 2.2 (3.9) 4.2 3.0 2.1 Q3 2021 > 2023
Eurozone 1.3 (7.2) 4.8 3.9 2.2 Q2 2022 Q4 2023
China 6.1 2.1 7.0 5.0 5.0 Q2 2020 Q4 2020
India* 4.2 (9.0) 10.0 6.0 6.2 Q2 2021 n/a
Japan 0.7 (5.5) 2.7 1.3 0.9 Q1 2023 > 2023
Russia 1.3 (3.5) 2.9 2.7 2.0 Q4 2021 Q2 2023
Brazil 1.1 (4.7) 3.2 2.6 2.6 Q3 2022 Q1 2023
U.K. 1.3 (11.0) 6.0 5.0 2.4 Q4 2022 > 2023
World¶ 2.8 (4.0) 5.0 4.0 3.6 n/a n/a
Sources: S&P Global Economics and Oxford Economics. *Fiscal Year ending in March. ¶Weighted by purchasing power parity. Table 3 from previous global economic forecast see, "Global Economic Outlook: Limping Into A Brighter 2021", published Dec. 3, 2020.

In the U.S.--the world's largest economy and where most of the brokers we rate are--the economy has thus far recouped two-thirds of the economic losses from the COVID-19 recession following a peak-to-trough GDP decline of roughly 10% (from the fourth quarter of 2019 to the second quarter of 2020). We expect the economy to get back to its year-end 2019 size by the third quarter of 2021 though still well below our pre-virus baseline for several years beyond that. Our base-case forecast foresees real GDP having declined 3.9% in 2020, then rising to 4.2% in 2021 and moderating to growth of 3% in 2022. We forecast the U.S. unemployment rate, following a spike to 14.8% in April 2020, to fall to 8.3% in 2020 and further decline to 6.4% in 2021, though it will not reach its precrisis low until after 2023.

Key risks to the baseline forecast include rollout and distribution of the COVID-19 vaccine, completion of new fiscal stimulus, and continued waves of COVID-19 resurgence crippling economic growth. These risks manifested with a weaker-than-expected jobs report in December 2020, with the unemployment rate stagnating for the first time in seven months at 6.7% amid high viral spread and increased economic restrictions. Still, we expect this jobs market slowdown to be temporary--once the vaccination rollout is farther along and economic restrictions loosen, our base-case expectation is for job growth to gradually reaccelerate.

Table 2

S&P Global Ratings U.S. Economic Outlook
Key indicator 2018 2019 2020E 2021E 2022E 2023E
Real GDP (% GDP) 3.0 2.2 (3.9) 4.2 3.0 2.1
Core CPI (%) 2.1 2.2 1.7 1.9 1.8 1.9
Unemployment rate (%) 3.9 3.7 8.3 6.4 5.6 4.6
Payroll employment (mil.) 148.9 150.9 142.2 146.3 150.0 152.6
Housing starts (mil.) 1.3 1.3 1.3 1.4 1.4 1.4
Unit sales of light vehicles (mil.) 17.3 17.1 14.4 16.4 16.7 16.8
S&P 500 Index 2,744.7 2,912.5 3,180.8 3,570.2 3,708.1 3,939.5
Federal funds rate (%) 1.8 2.2 0.4 0.1 0.1 0.1
10-year Treasury note yield (%) 2.9 2.1 0.9 1.4 1.7 2.0
Three-month Treasury bill rate (%) 2.0 2.1 0.4 0.2 0.2 0.2
E--Estimate. Sources: Oxford Economics and S&P Global Economics forecasts.

Chart 5

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Insurance Brokers: Poised For Growth

Year in review

Relative to the broader macroeconomic environment, insurance brokers on the whole can look back proudly at 2020. Following a robust first quarter, the sector was unexpectedly stress tested by the COVID-19-related shelter-in-place mandates and economic downturn. We, as well as the brokers we rate, never expected revenues to fall off a cliff, given the sector benefits from the generally nondiscretionary and naturally recurring nature of commercial insurance purchase. However, many issuers we spoke to at the early outset of the pandemic presented us with COVID-19-adjusted 2020 forecasts showing organic declines well into the negative territory, driven primarily by exposure declines (our early COVID-19-adjusted base-case forecast for organic revenue growth was flat to down by mid-single digits on average). Many issuers also began planning for the worst, through aggressive cost contingency plans and liquidity boosting initiatives such as revolver draws and a pause on mergers and acquisitions (M&A).

The year turned out better than anticipated for brokers. We now expect most brokers we rate to close out the year at flattish to slightly positive organic growth--light for a normal year but a win for 2020, in our view. While there are a couple of negative outliers, there are also several positive outliers with organic growth in the high-single digits or even low-double digits (mainly the specialty and excess and surplus players, who are benefiting from dynamics such as premium migration to the nonadmitted markets and particularly favorable pricing).

As expected, exposures were certainly a headwind and generally in negative territory for brokers, given reduced business activity, elevated unemployment, and business foreclosures. However, thanks in part to the forceful actions taken by the Federal Reserve and the fiscal stimulus provided by the federal government, the economic downturn was less severe than it might have been (S&P Global Ratings' latest base-case forecast is for real GDP to contract 3.9% for the year, relative to the mid-April forecast of a contraction of 5.2%). Moreover, brokers displayed healthier-than-expected new business and retention trends on solid sales execution throughout the pandemic, as producers successfully migrated sales initiatives to a virtual environment and demonstrated their value add to clients in helping them navigate the uncertain climate. Finally, unlike the global financial crisis of 2007-2009 when brokers were not only contending with declining exposure units, but were also operating amid a backdrop of declining property and casualty (P/C) insurance pricing trends, brokers entered this recession with composite commercial P/C pricing on the rise. This trend only strengthened throughout the year and served as a meaningful shock absorber against the weakened economy.

With overall organic growth coming in better than expected for most issuers, margins also showed stability and in many cases strengthened for brokers we rate (with some negative outliers). Brokers benefited from the self-correcting variable compensation lever, and of course natural expense reductions in the COVID-19 environment from items such as lower travel and entertainment. On top of that, a lot of brokers were very proactive on expense management at the outset of the pandemic and took significant expense cuts on discretionary line items preparing for bigger declines in revenue than they ultimately saw, which was a key driver for the margin improvement for various issuers. Ultimate variability in margin trend across the space was driven to some extent by how aggressive issuers were in their expense management strategies. On the more aggressive side, some companies continued to target margin improvement from the outset of COVID-19, aggressively reducing expenses through items such as salary and bonus reductions, suspension of 401K matches, furloughs, layoffs, hiring freezes, and other operational expense reductions. On the other hand, some issuers took a lighter approach to expense reduction and still went pretty heavy in 2020 on investments such as producer recruitment despite the tougher operating environment, with a longer-term view in focus. Either way, 2020 showcased brokers' ability to control their own destiny to a large extent on margins.

At the outset of COVID-19, we revised the outlooks on three of the 27 insurance brokers we rate to negative and placed our ratings on one issuer on CreditWatch negative. We took these actions on companies that were already operating at very limited cushion relative to our leverage downside triggers, combined with books of business that potentially had susceptibility to a somewhat outsized negative COVID-19-related impact. Since these initial rating actions, we have revised three out of the four negative outlooks or ratings on CreditWatch negative to stable outlooks based on relatively solid performance. Two of the companies with outlooks we revised to stable from negative are in the benefits space (Alera and OneDigital). While we originally believed this line of business had heightened risk given its revenue ties to the labor market in the context of spiking unemployment, the benefits segment in general has demonstrated greater-than-anticipated stability. In addition to the employment gains since the start of the pandemic, covered lives under employer-sponsor health plans proved more resilient than headline unemployment numbers. This is partially because many who lost jobs were in industries with lower penetration of employer health coverage to begin with, and a sizeable portion of those included in the unemployment statistics were people who were furloughed and retained employer-sponsored benefits.

Looking ahead

With an unprecedented year wrapped up relatively successfully, we believe brokers are well positioned for solid growth and profitability in 2021, though risks and uncertainty certainly remain with the pandemic still abound and the economic recovery in fragile early innings. Overall, we believe insurance brokers will demonstrate solid performance this year, generally supportive of current ratings.

Pricing And Exposures To Provide A Twofold Boost To Organic Growth

Market impact, which we believe is best captured by insurance premium growth (the base from which broker commissions and fees are largely derived) and encompasses both the insurance rate environment and insured exposures, was a tale of two cities for brokers in 2020. For the first nine months of 2020, U.S. statutory P/C direct premiums written rose 2.2%, albeit at a slower pace than the 4.8% in the prior year period, as rate increases mitigated exposure declines. In 2021, in contrast, we believe brokers will on the whole be beneficiaries of both positive insurance rates and also rising exposures.

On the rate side of the equation, we expect continued price momentum, albeit at a slowed pace, in 2021. Insurers generally pushed hard on rate in 2020 to combat loss inflationary pressures, pressure on investment income, elevated weather-related losses, higher expected reinsurance costs, and evolving pandemic losses. Of course, rate trends vary materially by line of business, but even workers' compensation, whose rates declined for years, has neared an inflection point. The P/C market is entering 2021 with continued ample capital, which in past pricing cycles has generally led to more competition and declining insurance rates. However, the investment environment was much different, with higher yields encouraging insurers to cash flow underwrite aiming to boost their investment portfolios versus achieve underwriting profitability. With the 10-year benchmark rate below 1%, combined with the various loss cost pressures, we think insurers will exhibit underwriting discipline, resulting in an insurance pricing environment that will remain strong in 2021 despite industry capital strength. But pricing increases should slow this year as the compounding of rate actions already taken enable insurers to achieve adequate underlying profitability and returns on capital.

Chart 6

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With commissions earned as a percentage of rates multiplied by exposure units, brokers will certainly benefit from the continued pricing momentum. However, we expect brokers will continue to help clients mitigate price impact by shopping coverage and working with clients to ensure the risk management programs fit their budgets (by increasing deductibles, reducing limits, modifying policy terms, etc.), particularly during this time of economic weakness when some businesses are unable or less willing to pay more for coverage. Additionally, larger customers often employ a fee-based structure that does not vary with the price of insurance, though commission-based larger accounts will likely benefit from a relatively more sizeable rate boost (average commercial price increases have been notably more significant for larger account size relative to smaller account size). Given these factors, we expect a portion, but not all, of the aggregate insurance price increases will be a boost to organic growth.

On the exposure side of the equation, we believe the global economic recovery underway will support rebounding exposure units, given exposures are heavily tied to economic variables including the level of payroll, inventories, and other insured risk. Comparisons may still be tough in the earlier part of the year, given the strong first quarter in 2020, the potential for audit premium adjustments early this year (though midterm audit adjustments throughout 2020 should soften that headwind), and the continued possibility of furloughs turning into layoffs. However, particularly as we get to second quarter and beyond with easier exposure comparisons relative to 2020 lows, exposures should be a net positive for brokers assuming the economy continues to stabilize.

With uplift from the market by way of both rate and exposure, we expect organic growth to improve relative to 2020, at 2%-5% for most issuers across the sector. Company-specific trends, however, will continue to vary greatly based on product diversification and geographic presence, as well as new business and retention strategies and success rates. In an increasingly complex business environment, the standouts will be those brokers that can differentiate themselves through value-added services and products, including enhanced data and analytical capabilities, and risk management expertise in existing and emerging risks (such as cyber risks, extreme weather, and social inflation).

Margins Should Hold, Though Catch Up Costs Will Come Back Into The System

The improvement in top line should help brokers produce at least stable margins, or better, in 2021 (though those with particularly outsized margin expansion in 2020 may show modest margin declines). S&P Global Ratings adjusted margins across the sector vary but are generally healthy and average in the high 20% area. We expect brokers to continue to bend the cost curve from prior and future cost cutting expenses and efficiency initiatives, including enhanced back-office technology and automation projects. In addition, as more flexible or remote work arrangements take greater prevalence, we think brokers will realize occupancy cost savings from real estate footprint optimization in 2021 and beyond.

Offsetting these benefits, in our view, are our expectations for added catch up expenses to the system in 2021 as brokers begin to renew travel and other expenses and investments that may have been postponed during 2020 given the uncertain macro environment. Additionally, we believe it is possible that brokers may incur incrementally higher errors and omissions (E&O) related legal expenses in the medium term because they are in certain instances also being named in lawsuits from insureds over COVID-19-related claim denials (with few exceptions, courts have ruled thus far in favor of insurers/brokers in coverage disputes brought by policyholders related to business interruption claims). Lastly, we expect restructuring and integration costs to continue to drag earnings and cash flow (we do not give credit for these costs in our credit-measure calculations, as we view them as the cost of doing business), particularly as brokers continue to pursue acquisition-oriented growth strategies.

M&A Continues With No End In Sight

Brokers entered 2020 with continued M&A momentum following a record-breaking year of deal activity in 2019 (at 649 announced agency deals in the U.S. alone). With the onset of COVID-19, deal activity materially slowed in the second quarter (M&A volume was 25% lower over prior year) as many industry participants sought to preserve liquidity or reassess deals amid market and valuation uncertainty. However, as brokers got more comfortable with generally solid performance trends during the pandemic, deal activity quickly regained traction in the third quarter. With accelerated activity in the fourth quarter as many sellers pressed to close deals before year end to hedge against a potential capital gains tax increase, full-year 2020 deal volume should tighten or close the gap relative to 2019.

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We expect M&A activity to remain robust in 2021, nearing or even exceeding 2020 levels, consistent with the flurry of acquisition activity that has been a mainstay in the insurance brokerage markets for years. The seemingly endless broker M&A frenzy boils down to supply and demand basics that will likely endure. On the supply side, while the industry consolidation of the last decade has driven a dent in increasing market share of the most active acquirers, the industry remains highly fragmented with plentiful inventory for acquisition opportunities (there are more than 30,000 insurance brokers remaining in the U.S. alone). Meanwhile, on the demand side, capital remains abundant, buoyed by easy access to still-inexpensive credit and a plethora of interested buyers. Most notably, a growing pool of private-equity-backed buyers (we estimate more than 20 private-equity-backed firms competing for acquisitions) has made up more than 70% of deal volume in the last year, and their interest is likely even further fueled through the industry resiliency reaffirmed through the pandemic.

It's not just private equity in the game. In addition to private-capital-backed buyers, publicly traded brokers are continuing to vie for deals. Since completing its largest transaction in company history in 2019 through the acquisition of U.K. specialty broker Jardine Lloyd Thompson (JLT),

Marsh & McLennan (MMC) has continued to selectively bolster its presence in its U.S. middle-market agency platform and will likely ramp up M&A activity now that its plan to lower leverage post-JLT is nearing completion. Additionally, at the outset of the pandemic in March 2020, Aon and Willis Towers Watson (WLTW) announced their intentions to merge in what would be the largest transaction in industry history if executed successfully (the deal is expected to close in 2021 but remains subject to regulatory approval, including a recently initiated European Commission Phase II review). If completed, Aon will notably overtake MMC as the world's largest insurance broker. In terms of the remaining public brokers, Brown & Brown and newly rated Gallagher continue to be highly active in the M&A arena. And newly rated BRP Group (currently the 32nd-largest broker in the U.S., according to 2020 Business Insurance rankings), which made waves in October 2019 as the first commercial insurance brokerage firm to IPO in 15 years, is in the second year of its long-term strategy to become a top 10 U.S. broker within 10 years.

In our view, the question is not whether the frenzy of acquisition activity will continue, just at what price. Although valuations have been high and growing, most in the buyers' club are valued at even higher multiples, keeping the deals accretive to value. The pandemic has not seemed to dent valuations, though we have noted more negotiated downside protection, including a greater proportion of earn-out consideration (i.e., a greater portion of purchase price deferred) and hold-backs. With the potential for higher tax rates with the new Democratic president and Democratic control of the House and Senate, as well as current legislation that shifts interest deductibility to EBIT from EBITDA in 2022 (very material for brokers, given all of the acquisition-related amortization), it remains to be seen whether the valuation creep will begin to moderate. We believe any downward pressure from tax change fundamentals could easily be offset by other valuation factors and market forces. At the end of the day, maybe valuations will start to temper or maybe not, but either way we see a long runway of consolidations ahead in the broker marketplace.

Through their acquisition strategies, many brokers we rate are successfully expanding geographic reach, scale, and content capabilities. Most deals are small and tuck-in by nature (with a few exceptions, such as the JLT deal by MMC and pending combination of Aon and Willis Towers Watson) and often within the acquirer's core competency, which limits integration risk to some degree, though there is a compounding effect for serial acquirers. We continue to monitor due-diligence practices and post-acquisition performance carefully and have noted few material operational hiccups to date. However, exacerbated by continued high purchase price valuations and earn-out obligations (which we treat as debt in our leverage calculations), acquisition strategies often prevent lowering leverage, particularly because excess cash-flow sweep provisions (that require debt pay-down) in many broker credit agreements typically have carve-outs for acquisition payments.

Capital Markets Activity Keeps Ratings In Check

The COVID-19-related economic downturn did not slow capital markets activity in the last year. In fact, it contributed to it. Aided by accommodative financing conditions across the sector, many brokers at the outset of the pandemic opted to bolster their liquidity via debt issuance (as well as revolver drawdowns) as a precautionary measure in response to uncertainty about the duration and intensity of the economic contraction and its potential impact on timing and receipt of cash flows. As brokers got more comfortable with the fairly modest pandemic impact on performance and stability of cash flows, however, capital markets activity only continued to accelerate. By the end of the year, nearly every rated broker accessed capital markets in some form for incremental financing, a handful of them on multiple occasions. Transaction activity was most commonly to fund M&A pipelines, though in the back half of the year we even saw in a few instances the resumption of debt-funded shareholder distributions or sponsor flips and in January 2021 we began to see a pickup in repricing activity.

Table 3

Insurance Broker Capital Markets Activity
Jan. 1, 2020 to Jan. 26, 2021
Company Timing Capital markets activity

Achilles Acquisition LLC (d/b/a OneDigital)

Jun-20 Incremental first-lien term loan issuance to repay revolver borrowings and add cash to balance sheet to fund acquisition pipeline
Oct-20 First-lien term loan issuance in conjunction with leveraged buyout by Onex Corp.

Acrisure Holdings Inc./Acrisure LLC

Jan-20 First-lien term loan issuance to refinance existing facilities and fund acquisition pipeline
Jan-21 Incremental first-lien term loan issuance to fund acquisition pipeline (commitments pending)

Alera Group Intermediate Holdings Inc.

Feb-20 First-lien term loan repricing to lower coupon
Jul-20 Preferred equity issuance to fund acquisitions, repay revolver borrowings, and add cash to balance sheet
Sep-20 Incremental first-lien term loan issuance to fund acquisitions pipeline.

Alliant Holdings L.P.

Apr-20 Incremental senior unsecured notes issuance to pay down outstanding revolver balance and to add cash to the balance sheet for general corporate purposes and for any unforeseen liquidity needs related to current market conditions
Oct-20 First-lien term loan issuance, senior secured notes issuance, unsecured notes issuance, and preferred equity issuance to fund a dividend and equity recapitalization, finance acquisitions, and support general corporate purposes

AmeriLife

Jan-20 First-lien term loan issuance and second-lien term issuance (privately placed) in conjunction with leveraged buyout by Thomas H. Lee Partners
Aug-20 Incremental first-lien term loan issuance and second-lien term loan issuance (privately placed) to fund acquisition pipeline
Nov-20 First-lien term loan issuance and second-lien term loan issuance (privately placed) to fund acquisition pipeline

AmWINs Group Inc.

Sep-20 Incremental first-lien term loan issuance and senior unsecured notes issuance to fund a dividend to shareholders

Andromeda Investissements (d/b/a April)

Jan-20 Finalization of incremental first-lien term loan issuance to buy out public shareholders

Aon Public Ltd. Co./Aon Corp.

May-20 Senior unsecured notes issuance to repay existing debt and for general corporate purposes

AssuredPartners Inc.

Feb-20 First-lien term loan issuance to refinance existing term loan, repay revolver borrowings, and fund acquisition pipeline
May-20 First-lien term loan issuance to repay revolver draw and add cash to balance sheet to bolster liquidity amid heightened sector uncertainty from COVID-19
Dec-20 Senior unsecured notes issuance to fund acquisition pipeline

BroadStreet Partners Inc.

Jan-20 First-lien term loan issuance to refinance existing capital structure and fund acquisition pipeline
Jun-20 Second-lien term loan issuance (privately placed) to fund partial equity recapitalization
Jul-20 First-lien term loan issuance to repay revolver borrowings and add cash to balance sheet

Brown & Brown Inc.

Sep-20 Senior unsecured notes issuance to repay revolver borrowings, general corporate purposes, and to fund acquisition pipeline

BRP Group Inc.

Oct-20 First-lien term loan issuance to refinance existing debt, fund acquisition pipeline, and for general corporate purposes
Dec-20 Public common share offering to fund acquisitions, purchase membership units, and add cash to balance sheet

Cross Financial Corp.

Aug-20 First-lien term loan issuance to repay existing debt, fund a share repurchase, fund acquisition pipeline, and for general corporate purposes

Galaxy Finco Ltd. (Domestic & General)

Jul-20 Incremental senior secured notes issuance (privately placed) and revolving credit facility upsize for increased liquidity

Hestia Holding SAS /Financiere Holding CEP

May-20 First-lien term loan issuance and second-lien term loan issuance (privately placed) in conjunction with leveraged buyout by BridgePoint
Dec-20 First-lien term loan repricing to lower coupon

Howden Group Holdings Ltd.

Oct-20 First-lien term loan issuance and equity injection to fund acquisition of A-Plan Group and repay revolver borrowings

HUB International Ltd.

Feb-20 Incremental first-lien term loan issuance (privately placed) to fund acquisition pipeline
May-20 Senior unsecured notes issuance to pay down outstanding revolver balance, which the company drew on in March as a precautionary measure to provide additional liquidity amid potential business disruption stemming from the COVID-19 pandemic
Sep-20 Incremental first-lien term loan issuance (privately placed) to fund a distribution to shareholders and redeem existing equity of parent company
Jan-21 First-lien term loan repricing to lower coupon and LIBOR floor

Marsh & McLennan Cos.

May-20 Senior unsecured notes issuance to pay down revolver borrowings and for general corporate purposes

NFP Corp./NFP Parent Co. LLC

Jan-20 First-lien term loan issuance to refinance first-lien facilities
May-20 Senior secured notes issuance to bolster liquidity amid heightened uncertainty from COVID-19-related business disruptions
Jul-20 Senior unsecured notes issuance to refinance outstanding senior notes and for general corporate purpose
Sep-20 Incremental senior unsecured notes issuance to fund acquisition pipeline and for general corporate purposes
Dec-20 Incremental senior unsecured notes issuance to fund acquisition pipeline and for general corporate purposes

Ryan Specialty Group LLC

Jul-20 First-lien term loan issuance to fund the acquisition of All Risks Ltd. and refinance existing debt

Saga plc

Oct-20 Equity issuance to provide increased liquidity cover and covenant headroom

USI Inc.

May-20 First-lien term loan issuance to fund acquisition of ABRC
Jan-21 First-lien term loans repricing to lower coupon (commitments pending)

Willis Towers Watson PLC / Willis North America

May-20 Senior unsecured notes issuance to repay upcoming debt maturity and revolver borrowings
Listed alphabetically by company and chronologically. For new ratings, includes activity at the time of rating initiation to Jan. 26, 2021.

Notably, we did not take any negative rating or outlook actions stemming from this year's debt issuances, which in some respects speaks to the sector's credit stability. With the exception of a couple of issuers that were already on negative outlook, all of the companies that added on debt this year did so in a manner that was within the bounds of our rating downside triggers. For many that were adding on debt to fund M&A, the add-ons came with incremental EBITDA of acquired targets that we include on a pro forma basis, which mitigated the increase in debt. Moreover, most of the companies had shown some trend of lowering leverage from profitable growth since the last time they accessed the capital markets, so they had built up incremental capacity within our leverage bounds. Brokers have relatively mild working capital and capital-expenditure needs and resultantly fairly high cash-flow conversion rates, which, combined with a relatively predictable and recurring revenue stream, allows for a naturally deleveraging business model. The sector's strong cash flow fundamentals have continued even in the current market environment as risk factors such as premium grace periods and higher days sales outstanding did not prove to hinder cash flows materially.

Rather than sustaining credit improvements, however, we rarely see reduced leverage for long, as brokers tend to revert to the mean through debt recapitalizations. For the privately owned brokers, which are generally dominated by financial-sponsor ownership, recapitalizations are driven by frequent debt-funded M&A, shareholder dividends, and ownership flips between sponsors, all norms in the space. For the public brokers, increased earnings generally translate to increased debt capacity for share repurchases, internal initiatives, and acquisitions. We expect this cycle of lowering and raising leverage to repeat itself in 2021, the former limiting rating downside and the latter limiting rating upside.

Rebound Underway For Health Insurance Servicers

Year in review

At the start of COVID-19 in early 2020, S&P Global Ratings expected health insurance services firms to be particularly exposed to pandemic-related disruption, with double-digit revenue declines for at least a couple of quarters predicted for many of these companies. Health servicers are a small but still diverse group of companies that manage medical costs on behalf of health care payers, including health insurers, P/C insurers, government entities, and employers. Relative to the brokers in the portfolio, we believed health servicers were more susceptible to performance pressure given potential declines in medical utilization (particularly on elective care) from social distancing and associated stay-at-home measures and, to a lesser extent, the unemployment spike impacting commercial insured membership. In addition, given the weaker business profiles for most of these companies, reflecting a narrower size and scope (often operating in a niche within a niche), relatively lower margins, and greater client concentration, there was less margin for error.

As we reflect on developments over the past year, we continue to expect most health insurance servicers we rate to close out 2020 reporting top-line decline, with the severity of the decline varying significantly by issuer but better than initially anticipated for many given a material rebound in medical utilization and claims volumes. Core revenues did generally take a steep dive in the second quarter, with double-digit declines for a significant portion of the issuers. However, by the third quarter, trends from the previous quarter showed material improvement with only one rated issuer in the subsector continuing to show double-digit declines relative to the prior year. With medical utilization and claims volume trends continuing to rise near pre-COVID-19 levels, fourth-quarter 2020 should show further improvement. In addition to a quicker-than-expected claims rebound, a highly recurring revenue stream, prior-year acquisition revenue flow through, and active new business pipelines helped to buffer pandemic-related revenue declines. In addition, health servicers, consumers, providers, and payers alike doubled down on telehealth adoption as another way to use medical care during the pandemic, which helped mitigate revenue declines.

Margins for rated health servicers generally held relatively steady, with some showing modest improvement and others modest declines as of the last 12 months ended Sept. 30, 2020. Health servicers, like brokers, benefit from the variability of cost structure, and in an effort to protect earnings, similarly implemented cost-cutting measures to varying degrees.

Chart 8

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At the outset of the COVID-19 pandemic, we revised our outlooks on five of the 10 health servicers we rate to negative: all three workers' compensation medical management companies (One Call, Medrisk, and Paradigm) and both out-of-network claims repricers (Zelis and Multiplan). Our outlook revisions were based on our views of particular susceptibility in these business models to earnings headwinds from likely lower claims volume. As we monitored company performance through the back half of the year and into 2021 and observed the notable quarter-over-quarter rebound even amid virus resurgences amid flu season, we revised our outlooks on four of these companies to stable (three of these revisions took place in January).

Given the pandemic pressures the sector faced over the past year, health servicers were fairly quiet on the M&A front, with limited acquisition activity. As the majority of the service companies we rate are smaller with weaker business risk profiles, focusing on core earnings was key as they navigated through the many unknowns. While health servicers were light as acquirers, they continued to be fair game as acquisition targets, and inorganic interest from insurers in acquiring health service firms grew. In the last year, UnitedHealth Group (A+/Stable/A-1) bought post-acute care management services provider Navihealth (B/Stable/-- until withdrawal at transaction close), MetLife (A-/Stable/A-2) announced it would acquire vision service provider Versant (B/Stable/--), and Centene (BBB-/Stable/--) announced its acquisition of behavioral health administrator and pharmacy benefits manager Magellan (BB+/Watch Pos/--). These acquisitions continue to showcase the vertical integration efforts across the health industry as insurers appreciate the added level of diversification health service companies represent, as well as their ability to manage the supply chain.

A generally quiet M&A pipeline for health servicers translated into very limited capital markets activity in 2020. Only MultiPlan, which became a publicly traded company this year via special purpose acquisition company (SPAC), accessed the capital markets in the fourth quarter with a refinancing and less debt-intensive capital structure (this further supported our outlook revision to stable for MultiPlan).

Looking ahead

In 2021, we believe health servicers will return to positive revenue growth, with a potentially wide range based on various product niches and company-specific factors. Growth for health insurance service firms will be driven by the U.S. remaining on the slow but steady path toward economic recovery combined with the return of medical utilization to pre-pandemic levels. This falls in line with more widespread availability of the COVID-19 vaccine, which S&P Global economists' forecast by midyear 2021, and should further support individuals feeling comfortable in a medical setting. While we believe there remains a level of uncertainty and risk regarding the pandemic, the good news is the beginning of the end is in sight. Widespread immunization should help pave the way for a gradual return to more normal levels of social and economic activity, which will help drive business activity for health servicers.

As business activity and claim volumes continue to return to pre-COVID-19 levels, we believe opportunity exists for health service companies to also benefit due to the effects of pent-up demand as people may be more focused on using their benefits in 2021 that they might have deferred in 2020. Health servicers are likely to see continued pressure on commercial insured group membership due to weak employment, but the trend should improve. Overall revenue and earnings growth for the year will likely gain more traction during the second half, resulting in better top-line performance relative to 2020 (particularly against a weak comparative base). Revenue growth should improve operating leverage, creating cost efficiencies for some companies. However, ongoing industry factors such as price competition, new client/contract implementations, and technology/systems investments will likely keep operating margins in check, resulting in overall steady margins relative to 2020.

As M&A activity among health servicers was relatively muted in 2020, activity may pick up in 2021 as these companies recover from the pandemic and potentially look to inorganic growth opportunities that they may have pushed off in 2020. We anticipate M&A to be mainly limited to tuck-in acquisitions that likely are funded by debt and cash on hand. We also expect to see continued interest from strategic buyers, including health insurers looking to pursue vertical integration opportunities. Over the longer term, this could be a risk factor if larger health insurers use their increased weight to gain pricing leverage with their outsourcing vendor/partners or reevaluate outsourcing decisions as they look to build their own health care services businesses.

Health servicers are entering 2021 with a new Democratic administration and a Democratic-controlled Congress. We believe Biden's top two legislative priorities will be addressing the pandemic and its economic impact. Given these priorities and the Democrat's slim control of Congress, we believe the highest-risk policy proposal for health servicers--some type of Medicare-for-all reform--is unlikely to happen. We believe this proposal will be a nonstarter for conservative Democrats and independent-leaning Republicans, who may have philosophical, revenue/tax, and cost issues that stand in the way. Rather, we believe that the Biden Administration will take a more moderate approach to health care reform by building on the Affordable Care Act (ACA), which may bode well for health servicers depending on the details. Biden's ACA proposals would likely include features that help to grow and stabilize the size of the ACA exchange market, such as enhancing ACA exchange subsidies and eligibility, and reinstating/expanding ACA marketing and outreach dollars. This would be a modestly positive development for health servicers in that it would increase the insured base that ultimately yields claims revenue.

Claims Adjusters And Warranty Administrators Showcase Stability

Year in review

The remainder of the insurance services companies we rate are mainly warranty administrators (covering handset protection, automobiles, and home appliances and electronics) and insurance claims adjusters. Our expectations and ultimate performance trends for these companies varied materially based on book of business spread, but the theme of sector resilience generally held true.

For the warranty administrators we rate, we believed the greatest pressure would be felt by those focusing on the auto space given the expected sharp decline in new auto sales. Our views were supported by S&P Global economist projections for a 16% decline in light vehicle sales in 2020 as well as a 4.3% decline in consumer spending. These projections drove rating actions on both auto warranty administrators we rate, including a downgrade combined with a CreditWatch negative for APCO given the potential for a covenant breach and a negative outlook on Amynta. However, we have since returned both ratings and outlooks on these companies to their pre-COVID rating level driven by stabilized performance. While light vehicle sales reached their lowest levels in second-quarter 2020 with 11.4 million in sales, a level not seen since 2011, since then the rebound has been notable at 15.6 million expected by year-end 2020 (though still below 17.1 million at year-end 2019). Moreover, APCO's strong profit sharing from a lower incidence rate on less miles driven along with higher attachment rates largely offset light vehicle sales declines while Amynta's business diversification across warranty and specialty risk as well as expense actions allowed for relatively steady results.

In terms of the remainder of the warranty portfolio, while it was not immune to the pressures brought on by the pandemic, we did not anticipate credit metrics to deteriorate outside of rating tolerances, supported by market leadership in respective niches, which proved true. Indeed, NEWAsurion, a global provider and market leader in handset protection, and FrontDoor, the largest home service plan provider, displayed relatively stable earnings driven by high retention levels and attachment rates supported by household focus on income protection.

Shifting focus to rated claims adjusters, with the economic downturn, we expected a level of variation in topline development as we forecasted pockets of pressure in certain lines of business to be largely mitigated by volume increases in other areas. Generally, workers' compensation claims are tied to unemployment levels and managed care claims to the level of medical procedures and utilization, all of which were negatively affected by the pandemic. On the contrary, COVID-19-related claims and workforce absence claims saw a significant spike--helping to stabilize overall top-line performance. If the pandemic was not enough to handle in 2020, claim adjustors also had an active catastrophe season; however, for claims adjustors this is a revenue driver. With puts and takes by line of business but a generally sticky and recurring revenue base, claims adjusters weathered the storm well, and we did not take any downward or upward rating actions on any of them throughout the year.

Similar to health servicers, margins also held steady for mostly all rated non-health third-party administrators (TPAs) through the 12 months ended Sept. 30 2020. All but one company has experienced EBITDA growth as of the 12 months ended Sept. 30, 2020, relative to year-end 2019, with modest M&A bolstering earnings for a few. A variable cost structure combined with cost-savings initiatives implemented during the pandemic have also generally upheld earnings for this sector.

Looking ahead

We forecast for rated TPAs to likely all report positive revenue growth in 2021, averaging in the mid-single digits. S&P Global economists project consumer spending growth of 5% and approximately 14% growth in light vehicle sales, which should bode well for warranty administrators' topline development. Furthermore, for claims adjusters, while organic growth is tied to trends in claims volumes as well as levels of carrier outsourcing, we are likely to see mostly positive growth for the various lines of business. The level of workers' compensation claims should rise as the unemployment rate is expected to improve to 6.4% in 2021, based on S&P Global economist projections. Additionally, managed care claims should also show favorable growth supported by the effects of pent-up demand for medical services. Property claims will be highly dependent on weather trends and with 2020 being the most active Atlantic hurricane season on record, this sector may see some decline. Regardless, we continue to expect sustained and stable utilization and demand from carriers for outsourced claims solutions, especially as claims adjusters continue to invest in client services and technological capabilities to support their client base.

Similar to health servicers, revenue and earnings growth for TPA's will likely be more meaningful during the second half of the year as vaccine availability becomes more widespread, which should result in a gradual return to more normalized business conditions and social activity. Further, we expect margins to continue to display stability. Also in line with health servicers, M&A in 2020 was limited to mainly small tuck-in acquisitions funded mostly by cash on hand supporting business diversity, and we expect largely the same for 2021, with likely some pickup given improving business trends.

Appendix: Insurance Services Rating Distribution, Strongest To Weakest

Table 4

Insurance Services Ratings, Strongest To Weakest
As of Jan. 26, 2021
Company Rating Outlook Business risk profile Financial risk profile Anchor Modifier (active)

Aon Public Ltd. Co/Aon Corp.

A- Stable [2] Strong [3] Intermediate a- Neutral

Marsh & McLennan Cos. Inc.

A- Negative [2] Strong [3] Intermediate a- Neutral

Willis Towers Watson PLC

BBB CW Positive [2] Strong [4] Significant bbb Neutral

Arthur J Gallagher & Co.

BBB Stable [3] Satisfactory [3] Intermediate bbb Neutral

Brown & Brown Inc.

BBB- Stable [3] Satisfactory [2] Modest bbb+ Financial policy: Negative (-1 notch), Comparative rating analysis: Negative (1 notch)

Magellan Health Inc.

BB+ CW Positive [4] Fair [2] Modest bbb- Comparative rating analysis: Negative (1 notch)

Frontdoor Inc.

BB- Stable [4] Fair [4] Significant bb Comparative rating analysis: Negative (1 notch)

NEWAsurion Corp./Asurion LLC/Lonestar Intermediate Super Holdings LLC

B+ Stable [3] Satisfactory [6] Highly/Leveraged [FS-6] b+ Neutral

AmWINS Group Inc.

B+ Stable [4] Fair [6] Highly/Leveraged [FS-6] b Comparative rating analysis: Favorable (1 notch)

MultiPlan Corp./MPH Acquisition Holdings LLC/Polaris Intermediate Corp.

B+ Stable [4] Fair [6] Highly/Leveraged [FS-6] b Comparative rating analysis: Favorable (1 notch)

Acrisure Holdings Inc./Acrisure LLC

B Stable [4] Fair [6] Highly/Leveraged b Neutral

Alliant Holdings L.P./Alliant Holdings Intermediate LLC

B Stable [4] Fair [6] Highly/Leveraged [FS-6] b Neutral

Andromeda Investissements (d/b/a April)

B Stable [4] Fair [6] Highly/Leveraged [FS-6] b Neutral

AssuredPartners Inc./AssuredPartners Capital Inc.

B Stable [4] Fair [6] Highly/Leveraged [FS-6] b Neutral

Hestia Holding SAS/Financiere Holding CEP

B Stable [4] Fair [6] Highly/Leveraged [FS-6] b Neutral

Howden Group Holdings Ltd.

B Stable [4] Fair [6] Highly/Leveraged [FS-6] b Neutral

HUB International Ltd.

B Stable [4] Fair [6] Highly/Leveraged [FS-6] b Neutral

Ryan Specialty Group LLC

B Stable [4] Fair [6] Highly/Leveraged [FS-6] b Neutral

Saga plc

B Stable [4] Fair [6] Highly/Leveraged b Neutral

Sedgwick L.P./Sedgwick Claims Management Services Inc.

B Stable [4] Fair [6] Highly/Leveraged [FS-6] b Neutral

USI Inc.

B Stable [4] Fair [6] Highly/Leveraged [FS-6] b Neutral

Versant Health Holdco Inc.

B Stable [4] Fair [6] Highly/Leveraged [FS-6] b Neutral

Achilles Acquisition LLC (d/b/a OneDigital)

B Stable [5] Weak [6] Highly/Leveraged [FS-6] b Neutral

Alera Group Intermediate Holdings Inc.

B Stable [5] Weak [6] Highly/Leveraged [FS-6] b Neutral

AmeriLife Holdings LLC/AmeriLife Group LLC

B Stable [5] Weak [6] Highly/Leveraged [FS-6] b Neutral

APCO Holdings Inc./APCO Super Holdco L.P.

B Stable [5] Weak [6] Highly/Leveraged [FS-6] b Neutral

Broadstreet Partners Inc.

B Stable [5] Weak [6] Highly/Leveraged [FS-6] b Neutral

BRP Group Inc.

B Stable [5] Weak [6] Highly/Leveraged b Neutral

CP VI Bella Midco LLC (d/b/a MedRisk)

B Stable [5] Weak [6] Highly/Leveraged [FS-6] b Neutral

Cross Financial Corp.

B Stable [5] Weak [6] Highly/Leveraged b Neutral

Integro Parent Inc. / Integro Group Holdings L.P. (d/b/a Tysers Insurance Brokers Ltd.)

B Stable [5] Weak [6] Highly/Leveraged [FS-6] b Neutral

KWOR Holdings L.P. (d/b/a Alacrity)

B Stable [5] Weak [6] Highly/Leveraged [FS-6] b Neutral

Outcomes Group Holdings Inc. (d/b/a Paradigm)

B Stable [5] Weak [6] Highly/Leveraged [FS-6] b Neutral

Zelis Holdings L.P.

B Stable [5] Weak [6] Highly/Leveraged [FS-6] b Neutral

Galaxy Finco Ltd. (Domestic & General)

B Negative [4] Fair [6] Highly/Leveraged [FS-6] b Neutral

NFP Corp./NFP Parent Co. LLC

B Negative [4] Fair [6] Highly/Leveraged [FS-6] b Neutral

AIS HoldCo LLC (d/b/a Franklin Marshall)

B Negative [5] Weak [6] Highly/Leveraged [FS-6] b Neutral

Amynta Holdings LLC

B- Stable [5] Weak [6] Highly/Leveraged [FS-6] b- Neutral

Confie Seguros Holding Co./Confie Seguros Holding II Co.

B- Stable [5] Weak [6] Highly/Leveraged [FS-6] b- Neutral

Huskies Parent Inc. (d/b/a Insurity Inc.)

B- Stable [5] Weak [6] Highly/Leveraged [FS-6] b- Neutral

KeyStone Acquisition Corp. (d/b/a KEPRO)

B- Stable [5] Weak [6] Highly/Leveraged [FS-6] b- Neutral

Mitchell TopCo Holdings Inc.

B- Stable [5] Weak [6] Highly/Leveraged [FS-6] b- Neutral

One Call Corp.

B- Negative [5] Weak [6] Highly/Leveraged [FS-6] b- Neutral

Acropole Holding/ Sisaho International SAS (Siaci Saint Honore)

CCC+ Negative [5] Weak [6] Highly/Leveraged [FS-6] b- N.A.
Companies listed in order of ratings and outlook. Companies with the same ratings and scores are listed alphabetically. Table excludes Qualicorp Consultoria e Corretora de Seguros S.A. as we only have a national scale rating on the entity. N.A.--Not available.

This report does not constitute a rating action.

Primary Credit Analysts:Julie L Herman, New York + 1 (212) 438 3079;
julie.herman@spglobal.com
Francesca Mannarino, New York + 1 (212) 438 5045;
francesca.mannarino@spglobal.com
Secondary Contacts:Joseph N Marinucci, New York + 1 (212) 438 2012;
joseph.marinucci@spglobal.com
Colleen Sheridan, Albany + 1 (212) 438 2162;
colleen.sheridan@spglobal.com
Brian Suozzo, New York + 1 (212) 438 0525;
brian.suozzo@spglobal.com
Lawrence A Wilkinson, New York + 1 (212) 438 1882;
lawrence.wilkinson@spglobal.com
Mathieu Farnarier, London + 44 20 7176 8608;
Mathieu.Farnarier@spglobal.com
Research Contributor:Ria Jadhav, CRISIL Global Analytical Center, an S&P affiliate, Mumbai

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