Welcome back! It was a busy Q2 2024 with lots of exciting developments in the insurance industry so let’s get started.
Recapping Q2 2024, the global economy showed recovery signs with easing inflation and robust labor markets, though growth stayed below pre-pandemic levels. Equity markets rallied, led by large-cap growth stocks, while global manufacturing expanded across major economies. Signs of easing inflation prompted increased expectations of monetary easing, despite persistent core inflation in the U.S. U.S. consumer spending exceeded expectations but may decline as pandemic savings deplete. Geopolitical conflicts risked higher import and oil prices, impacting inflation and interest rates. AI’s productivity boost was delayed by high energy costs, potentially widening economic inequalities.
During the same time, the global insurance industry saw significant technological advancements and strategic shifts. The adoption of cloud solutions and AI technologies increased, enhancing efficiency and customer service, although widespread practical AI applications remain on the horizon. Insurers focused on balancing affordability and insurability, leveraging new technologies and preventive measures to manage rising risks. Additionally, there was a notable shift toward digital ecosystems, facilitating service integration and more personalized offerings.
Overall, the industry demonstrated resilience through strategic risk management and financial adaptation, navigating a complex and challenging economic environment.
M&A Update
The first half of 2024 experienced an overall decline of deal volume compared to the first half of 2023. There were 300 announced agency transactions, down 22% from 385 executed deals in H1 2023, as revealed in a recent report by OPTIS Partners, LLC.
Similar to prior years, private equity backed, and hybrid buyers continue to dominate the M&A space, accounting for 60% of the transactions in H1 2024. Broadstreet Partners, Inszone Insurance Services, and Hub International led the pack with 46, 27, and 26 acquisitions, respectively. Notable transactions from Q2 include:
- Aon purchased NFP corporation for $2B in April.
- Stone Point Capital led the $3.4B purchase of Truist Insurance Holdings in May.
- Marsh McLennan completed the $58MM purchase of Fisher Bown Bottrell in June.
Despite the eighth consecutive quarter downturn in transaction volume, deal activity remains elevated compared to pre-COVID levels. While some previously active buyers have focused on integration, it is apparent there is still an abundance of capital to be strategically deployed in this space, and agency values continue to hold resilience versus the global M&A market.
Source: https://optisins.com/wp/2024/07/h1-2024-ma-report/
Insurance Agency Banking
Veritex has spent the last two years establishing a robust Insurance Agency & Brokerage banking platform that allows us to promptly address needs. Our relationship driven approach combined with industry expertise ensures quick, effective solutions that are offered through conventional methods or SBA channels.
- Acquisition Loans
- Partner Buyouts
- Lines of Credit
- Letters of Credit
- Up to 100% Financing
- Up to 10-year Repayment Options
- Competitive Rates
- Creative Treasury Solutions
Recent closings include:
Commercial Agency
Q2 2024
$500,000
Acquisition Loan & Treasury Solutions
Commercial/Personal Agency
Q2 2024
$1,500,000
Acquisition Loan & Treasury Solutions
The Rise of Telematics
Telematics technology, integrating GPS and cellular signals to monitor driving habits, has ushered in a new era for the auto insurance industry. This sophisticated technology collects data on vehicle usage and driver behavior, providing insights previously beyond reach. According to an article from the Insurance Business Magazine by Kenneth Araullo, while initially predominant in the commercial trucking sector, telematics now plays a pivotal role in setting insurance premiums based on real-time driving behaviors rather than traditional factors like location and claims history.
Significant advancements in positioning accuracy and the widespread adoption of smartphones have made telematics accessible to smaller businesses. This allows for proactive risk management and insurance premiums more accurately aligned with actual driving patterns.
Once prohibitive from a cost perspective, telematics systems have decreased as modern solutions often require just a smartphone app. In addition, companies like OnStar, a subsidiary of General Motors, offers telematics services that include vehicle diagnostics, navigation, and emergency services. In recent years, it has expanded into insurance telematics through partnerships with various large insurance companies. OnStar-equipped vehicles collect data on driving behavior, such as speed, braking, acceleration, and the time of day the vehicle is driven.
Until earlier this year, this practice had practically gone unnoticed by the consumer. On June 6, the Texas Attorney General’s Office joined the recent swell of regulatory and judicial scrutiny into privacy issues related to connected cars, driving data, and telematics, launching an investigation on the data practices of several car manufacturers. The AG attributed the investigation to growing concern related to recent “widespread reporting” of allegations that car manufacturers are collecting vast amounts of driver data without the driver’s knowledge and selling the data to third parties, including insurance companies. Thus far, a wide range of documents have been requested from Mitsubishi, General Motors, Kia, Honda, Subaru, and Volvo.
This will be an interesting story to follow…
Interest Rate Update
On June 12, the FOMC released their updated Dot Plot (see below – light blue dots and orange line), while at the same time voting 12-0 in favor of retaining the Fed Funds Target Rate at 5.25% – 5.50%, where the rate has been since July 2023. In a somewhat surprising move, the newly released Dot Plot only calls for one 25-bps rate cut in 2024 vs. the three 25-bps rate cuts that were included in the March dots (dark blue dots and grey line – you can see both lines in the chart below). One of the two expected cuts that were removed from the dots was actually shifted to 2025, while the other one just kind of disappeared. Clearly the Fed continues to maintain the “higher for longer” campaign and is reinforcing its call for patience as it continues to monitor ongoing economic information.
On Thursday, July 11 the market and the Fed finally received some economic news they had been seeking – an expected weakening of the CPI numbers. CPI MOM (month-over-month) actually fell -0.1% in June, while the headline number dropped from 3.3% YOY in May to 3.0% YOY in June. The “core” CPI, removing the volatile food and energy components only fell from 3.4% to 3.3%; however, the movement is in the right direction and has been much lauded by the market. Swap markets are now pricing in a 100% probability of a 25-bps rate cut in September, and a 100% probability of a second 25-bps rate cut in December with approximately a 70% chance of another (third) rate cut before the end of 2024; equity markets are at or approaching new highs. There is even some talk of the possibility of the Fed implementing a 50-bps rate cut rather than just the standard 25 bps in September or December.
From our perspective, this is another market overreaction from a market that is seeking to justify current valuations with near-term rate cuts. The Fed continues to be insistent about its target, noting in the June 12 statement that “The Committee is strongly committed to returning inflation to its 2% objective.” While 3.0% headline inflation is better than 3.3%, there is still a ways to go to achieve the Fed’s stated and reaffirmed target of 2.0% inflation. While market valuations continue to rise based on expected rate cuts, additional support for future rate cuts will likely be required in the form of continued softening in upcoming economic releases. We will get an update on the Fed’s preferred measure of inflation, the Core PCE Price Index, on July 26 where the current expectation is that the measure will remain at the prior month’s reported level of 2.6%. Of course, any softening in this index will go a long way toward providing the consistency of data the Fed is seeking to justify near-term interest rate cuts.
BaaS/InsurTech Updates
Veritex’s own Fintech and Insurtech guru, Jay Darnell, was recently featured on the podcast Driving Innovation in Payments: Insights from Veritex and Visa hosted by the National Center for the Middle Market (“NCMM”). Participants of the podcast also included Doug Farren (Managing Director for the NCMM) and Leigh Radtke (Head of NA Product for Visa).
During the podcast, Jay discusses what we’re doing with our Insurance Banking Group here at Veritex.
“As Middle-Market ownership and leadership become younger, we are recognizing that they are accustomed to convenient and digital solutions in their personal financial life … and, expect the same experience in running their business.
Some have referred to this as the ‘consumerification’ of business. Banks like Veritex have done a great job in developing banking solutions that meet those needs … like digital banking, automated account openings, and loan applications, while still delivering the personal touch that our bankers take pride in while serving our clients.
As an example, Veritex has stood up a dedicated team of bankers and treasury professionals in our National Specialty Sales Group that specifically work with middle market companies in the insurance industry vertical. This team brings more than 75 years of collective experience together to serve our clients across the country. To support their practical experience in middle market insurance banking, we launched an Insights Engine tool that systematically monitors and proactively delivers key trends and developments within the industry in near-real time. It’s a great example of bringing expert bankers together with innovation to serve our clients.”
Click Here to listen to the entire podcast.
all things golf
Much has been made of Scottie Scheffler’s 2024 season. When he won the Travelers Championship in June, he became one of just six players in history to win six events before July. Three others were Texans (Jimmy Demaret, Byron Nelson, and Ben Hogan), and the other two should be familiar, Arnold Palmer and Sam Snead.
A majority of the Veritex roster is focused on the pursuit of their 2025 PGA Tour Card. Unless you win a tournament, the only way a player keeps status on the PGA Tour is to finish in the top 125 of the FedEx Cup points race. If they don’t earn enough points, they are relegated to the Korn Ferry Tour, whose top 30 players at the end of the season get bumped up to the PGA Tour. For all the perceived glamour, it is a competitive and sometimes lonely existence during the season-long grind on Tour.
Veritex Ambassadors Chandler Phillips, Sam Stevens, Mac Meissner, Hayden Springer, and Pierceson Coody are all in good positions as the summer swing continues. On the Korn Ferry Tour, Max McGreevy is already Tour-bound after a win and four other top 10 finishes, while both Noah Goodwin and Sam Bennett are within the top 30 with steady play.
Veritex has three Collegiate Ambassadors who wear our logo when competing as individuals. Each has an ‘NIL’ agreement, allowing us to use their name, image, and likeness in advertising. Given their status as college athletes, we see some of the greatest social media marketing return from these players.
Sadie Englemann (Austin) and her Stanford teammates won the Women’s Golf National Championship. Jennie Park (The Colony) and Texas A&M lost in the quarterfinals to UCLA. Preston Stout, who tied for individual honors at the Big XII Championship, advanced with Oklahoma State through the Regional Finals but did not make the match-play at the National Championship.
Our full roster is always listed on the Veritex Bank website. Follow all our Team Veritex players as ‘Favorites’ on the PGA Tour App.
Veritex On the Road Again
Insurance Council of Texas
Earlier this month, we had the pleasure of sponsoring and attending the annual Insurance Council of Texas Symposium. We networked with those so ingrained in the continued success of the P&C market in Texas. We thought we would share some of our most meaningful take aways in hopes to spark conversation with you at some point soon.
- The average household ‘tax’ from tort cases is more than $3,000. The continued increase in litigation and large dollar verdicts are having a material impact on claim costs. If you compare to Medical Professional Liability segment performance, for example, there is a noticeable improvement in the experience following tort reform that results
- Artificial Intelligence, however, you may define it, has been and will increasingly play a role in many aspects of insurance.
- For the first time ever, AM Best issued a positive outlook for the reinsurance segment.
Independent Insurance Agents of Dallas
All Industry Day is taking place August 15th, we’re excited to participate in a variety of breakout sessions consisting of the Federal Reserve Forecast, internal strategies to enhance agency value, and tradeshow. Our team is hosting an exhibitor booth, ready to meet with leaders, explore banking needs, talk insurance, and hand out swag.
Dig In with Doug
While some of our readers are acutely in tune with statutory accounting principles, others might appreciate the nuances and perhaps learn from the relationship between insurers financial performance and the rising premiums we have all become accustomed to.
Somewhat of an illustrative reference, I overhead the concept of rate increases being compared to a pig being pushed through the python. Simply put, insurers can only recognize premium revenue as earned over the due course of risk, with rate increases typically take effect at renewal. Thus, over policy periods, the rate increases eventually find their way all the way through, albeit at a slow pace.
Almost daily, we continue to read headlines regarding rate increases, predominately homeowner and auto lines. Nonetheless, it appears with exception to workers comp, most P&C lines remain in a hard state.
The P&C U.S. Market is approaching $1 trillion in written premium, with a growing percentage being directed to the E&S market, a trend we have kept an eye on. On the same token, overall Capital & Surplus touched $1 trillion again and global reinsurance capital rebounded from 2022 with much of the industry being impacted by higher losses.
The state of the P&C industry overall, seems resilient and solvent despite continued headwinds with inflation, litigation, and other contributing factors leading to the aforementioned increases.
On the flip side, the U.S. Life Insurance segment continued to experience growth on the backs of a seemingly healthy economy and ‘higher for longer’ rates. Total life premiums surpassed 2022, almost touching $214 billion in 2023; individual annuity issuances, similarly, reached an over 20-year high.
Legislative – Being involved with several trade organizations, we can sense the legislatures gearing up for the upcoming session in 2025 on the heels of the 2024 U.S. Presidential election. We plan to highlight some of the major topics discussed in upcoming newsletter posts. Some that have already surfaced or have been hot topics of conversation include:
- Application misrepresentation, life insurance policy recissions and contestability periods for L&H Carriers.
- Abuse of legal system and reform for litigation funding.
