The mergers and acquisitions (M&A) market broke records again in 2021. Strong M&A activity has continued into this year, bustling across industries, most notably in sectors with higher instances of favorable demographics regarding ownership. Deals are happening frequently in manufacturing, telecom, biotech, and insurance.
Strategic consolidation will positively impact the insurance industry as a whole by supporting the next generation of talent, fueling the long-term success of sellers with the resources of larger organizations and, most keenly, alignment with the “right” culture. Carriers will benefit by creating a smaller number of touch points to access the same or more premium dollars.
The level of consolidation we are seeing today has historical precedent. The insurance brokerage industry went through a cycle of aggregation and fragmentation in the 1990s and early 2000s. This was a period marketed by the Top 10 brokers consolidating the next twenty largest brokers. At that time the market lost brokerage firms like Jardines, J&H, Sedgwick and Alexander and Alexander, among others.
This created a void for middle market clients, where accessing quality brokerage had more to do with the premium dollars you brought than the expertise you needed. This spawned the creation of new brokerages, Risk Strategies being one of them, founded by an employee-focused client advocate with a very high level of technical expertise. Risk Strategies became a landing spot for the entrepreneurial insurance executive who did not want to be a part of a big broker that would ration resources and minimize relationships and individual spirit. Many firms founded at that time grew substantially and are now acquiring businesses themselves or became platforms, like Risk Strategies.
Acquisitions have become more necessary in the past 25 years, from many sellers’ perspectives. In the early 2000s, there were very few private equity firms fully integrating businesses. It was possible to buy a company for five times EBITDA (earnings before interest, taxes, depreciation, and amortization), which made it easy for firms and brokerages to be perpetuated internally, passed down to children or younger producers. A seller could easily finance the transition over 5 years. The first dynamic to impact the ability to internally perpetuate was the entry of banks into the insurance sector. Multiples were driven up, but as of today many banks have exited the space as the growth thesis never panned out.
Private equity firms have since made that path less viable. To perpetuate a business from one generation to the next, the younger generation must now be willing to take on a tremendous level of debt and risk. In this environment, M&A deals with favorable cultural dynamics can be more appealing, offering sellers assured wealth opportunities.
Currently, there are approximately 40 large insurance brokerage platforms making acquisitions in the market, each with differing strategies and outcomes. Sellers have a variety of options when it comes to choosing a buyer to perpetuate their business. A revenue rollup strategy focuses solely on short-term financial gains by way of financial arbitrage. At some point those firms will invariably be sold to large strategic buyers. Some buyers will take a majority interest in a firm but leave the seller with a minority position in their original business. In this model, some resources may be made available, but it is mostly a bet-on-yourself strategy with a partial liquidity opportunity upfront. Partial integrators merge the seller’s business into existing broker operations, but with limitations on access to resources and they are often at a cost.
Full-integration buyers with high levels of expertise, of which there are few, bring the acquired business fully into the fold, offering access to resources, carriers and clients. This creates an enhanced opportunity to provide better coverage through broader carrier access, and access to proprietary market programs. Additionally, acquired businesses can leverage resources to pursue larger opportunities within spheres of influence and full-integration buyers provide far greater career opportunities to employees. Full integrators encourage the acquired business’s employee base to grow personally and professionally by being part of a larger organization and in limited organizations, the opportunity to foster and maintain an entrepreneurial, collaborative spirit.
Sellers who prioritize what the business looks like in five years over the size of their payout on day one should seek a full integration partner with a highly aligned culture. In order to ensure long-term priorities are aligned, sellers should perform due diligence on potential buyers, checking references, calling previously acquired businesses, and working closely with banker partners.
M&A activity within the insurance brokerage space will benefit carriers by providing aggregated premiums, reducing the number of brokers and insureds they must call to secure deals. Carriers that embrace consolidation and build relationships with larger national brokers on their terms will protect and enhance their business.
From a coverage perspective, clients will benefit through access to more carrier partners with strong relationships with larger brokerage firms and significantly enhanced benches of talent.
The insurance industry is struggling with generational challenges as many aging leaders approach retirement. Mergers and acquisitions can offer sellers an excellent succession plan if the sale is to the right partner.
There are many examples of a sale to a full integration brokerage fostering the next generation of insurance professionals. An environment where a large business puts people first significantly enhances a younger employee’s opportunity. Talent from acquired businesses will grow into future leaders with impressive client bases and multi-million-dollar books.
In its acquisition strategy, Risk Strategies has focused on acquiring talented people, not just businesses. Risk Strategies is committed to supporting the next generation through training programs, internships, and advancement opportunities.
Interest rates and inflation are rising, which will inevitably affect the insurance industry. At what scale and in what way, we may not know for another year. It will likely become more difficult, or more expensive, for large brokerages to obtain the debt required to buy attractive partner firms. This could slow buying activity or put downward pressure on multiples.
Buyers will also begin to scrutinize their core business, becoming more selective about acquisitions to ensure they can withstand an economic downturn. On the seller side, businesses may move quicker to sell fearing for the longevity of their business or the ultimate enterprise value.
M&A activity in the insurance brokerage space will continue, eventually leading to a consolidation of the consolidators as it did in the 1990's and early 2000s. This stage of consolidation will fuel the growth of the next generation of firms. This may inspire young producers to form new firms and grow into industry leaders. It is cyclical and the next generation of entrepreneurs, like our founder Mike Christian, is out there developing skills and waiting for the paradigm to shift.
The future of the insurance brokerage industry is filled with enormous opportunities for buyers, sellers and talented associates of all levels.
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Email me directly at jvaglica@risk‐strategies.com.