Middle market firms show growth despite inflation risks – Chubb

Confidence is rebounding but leaders remain cautious about capital investments

Middle market firms show growth despite inflation risks – Chubb

Insurance News

By Gia Snape

Middle market companies in the US – those with revenues between $10 million to $1 billion – maintained growth momentum in the second half of 2022 despite risks posed by inflation, a looming economic downturn, and residual pandemic impacts.

Economic confidence is also rebounding after a downturn during the pandemic, with more middle market firms cautiously eyeing expansion this year, according to a new report by Chubb and the National Center for the Middle Market (NCMM). At the same time, companies expect revenue and growth to cool slightly as 2023 unfolds.

Mean revenue growth among firms surveyed remained steady in Q4 2022 (12.2% compared to 12.3% in Q4 2021), but more than half (58%) expected to increase revenue this year. Hiring also rose with mean employment growth of 11.1% in Q4 2022, compared to 10.8% in the prior year.

“The overall story is that performance remains extremely strong,” said Doug Farren (pictured right), managing director of the NCMM.

How is inflation impacting middle market companies in the US?

The survey, called the Middle Market Indicator, aims to give a picture of business trends and evolving risks in the middle market segment. It polled 1,000 executives from US firms.

While the NCMM welcomed the growth momentum among companies, Farren noted that this could be attributed to firms passing on higher costs to consumers. Inflation and the supply chain remain the top risk management challenges for businesses in this segment.

Companies are feeling inflation’s impact the most from wages and salaries (46%) and the cost of goods and raw materials (44%). Roughly two in five firms (38%) are delaying capital investments due to inflation.

“What we haven't seen bounce back as quickly is capital investment planning, there is still a bit of a lag, partly due to the increase in interest rates, but also because of additional [economic] uncertainty causing middle market leaders to be more conservative, especially when it comes to making large capital expenditures,” Farren said.

Ben Rockwell (pictured left), division president of Chubb Middle Market, said that inflation will continue to put pressure for middle market companies. According to the survey, 69% of leaders are considering raisin their insurance coverage to compensate for inflation.

“If you’re faced with a high inflationary environment, the cost of building materials and labor will require [companies] to stay up to speed in terms of valuation,” Rockwell told Insurance Business.

“It requires good scrutiny around insurance limits and the program structure that companies put together.

“It’s important that companies work closely with their agents and brokers to evaluate their limits and review their exposures.”

Optimism rebounding among middle market leaders

Crucially, the Chubb and NCMM report found that middle market firms are becoming more confident in the economy and optimistic about the future, reversing a downward trend. About three-quarters (73%) of middle market companies expressed confidence in the global economy, versus 64% in Q2 2022.

In the next year, more companies expect to bring in new equity investment (58%, higher by 4% from Q4 2021); add a new plant or facility (52%, up by 6%); or expand into new international markets (51%, rising by 3%).

Though confidence has yet to return to pre-pandemic levels, Farren said firms are still forging ahead with expansions.

“Given the supply chain disruptions, a lot of businesses are starting to look at reshoring and bringing manufacturing back into the US, either inside of their company or through domestic suppliers,” he told Insurance Business.

“That could mean potentially adding new plants, facilities, and warehouses. We expect this type of activity to continue, because it’s how these businesses have been successful over time – through expansion, developing new relationships in their markets, and being innovative in their products.

“But a lot of it is going to depend on whether some of the uncertainty fades over the course of the year.”

For Rockwell, the optimism and resulting expansion activity among middle market firms means agents, brokers and insurers is more critical than ever.

“Many of the agents and brokers that we work with have tremendous services that they bring to these discussions. Partnering with insurance carriers that can either complement or add to those services can help customers understand their risks and what they can do to mitigate those risks,” Rockwell said.

“It’s more critical than ever to have regular dialogues to ensure that we're on the same page, which is why I think the study is so important.”

What is your outlook on middle market business in the US for 2023? Share them below.

Related Stories

Keep up with the latest news and events

Join our mailing list, it’s free!