Kris Allison
President, Chief
Executive
Burnham Benefits Insurance Services Inc.
Irvine
There has been consolidation in the brokerage community for years, a trend that appears to be accelerating. To understand what is driving this trend, one needs to examine the industry landscape.
Employee-benefits insurance brokers are being asked to do more for clients than ever before, a trend accelerated by the complexities of the Affordable Care Act. The ACA has created a complete disruption in the healthcare industry and has imposed significant regulatory requirements upon providers, insurers, employers and individuals. However, it has also spurred a tremendous amount of innovation that has led to new, local provider networks, alternative funding arrangements, new types of plans, technological innovation, a renewed focus on wellness, and more consumer choice.
The role of the employee-benefits broker has evolved into one of an adviser. It is no longer enough to market a benefits program and help with open enrollment. Employers still need help understanding their plan options, but they also want to look at funding alternatives, such as limited funding, self-funding and captives. They need guidance to help navigate all of the regulatory requirements placed upon them by ACA, as well as state and local ordinances. They are looking for ways to engage their employees to embrace healthier lifestyles because they recognize that a healthier work force is the one certain way to control medical costs long term. In addition, they want someone who can help educate their employees about their health and wellness options so that they become knowledgeable consumers when it comes to healthcare and health insurance.
The modern benefits adviser recognizes that his or her role is changing and is embracing the change through the addition of people and resources to meet clients’ rising expectations. It’s an expensive proposition, but these are the brokers that are not only growing but thriving in this environment. The traditionalists—typically smaller brokers who don’t have the resources to invest in the talent needed—are the agencies more likely to be acquired over time.
The buyers today are public companies; privately held, equity-backed firms; and large regional brokers. All three have invested in the types of resources needed to service employee-benefits clients today. Each can be a good option for a selling agency, depending on the seller’s personal goals.
At Burnham, we have always had a forward-looking investment strategy and as a result have the depth and breadth within the industry to be active as a consolidator.
Nancy Brown
Senior Vice President, Benefits Division
SullivanCurtisMonroe
Irvine
We’ve seen an increasing number of carriers and agencies merge in the past few years. Carriers are indicating that they are doing this not only for scale of business and to expand in additional markets, but for savings that would allow for new technology needed due to additional regulatory requirements. It’s not much different for brokers. We are constantly striving to grow and to provide the additional needed services to our clients in this increasingly complicated regulatory atmosphere. That means we have targeted these value-added services and the personnel to back them up, in addition to traditional brokerage services.
One of the risks of growth and merging is that corporate culture can change rapidly and good employees can be lost in the mix. We’ve set our goal to encourage individual growth within our company. The need for new services and proficiencies has provided new opportunities to our employees, and we of course are always looking for new talent to join our team. This is a hectic but exciting time for all of us.
Matthew Hanson
President
Centennial
Costa Mesa
There are 5,837 fewer brokers today than 10 years ago. Consolidation will continue as today’s largest and smallest brokerage firms continue to cede territory to the emerging super regionals and new competitors. There is a significant opportunity for larger regional players to outperform and innovate. Technology is a great equalizer, but only if you have the manpower and knowledge to asses it, implement it and manage it. Larger firms are trapped in legacy systems and legacy thinking, while the smaller firms with one or two principals or sales drivers can’t keep up or keep track of innovation and don’t have the resources to implement and execute at the level needed to produce great outcomes for their customers.
The increased demands of customers and the complexity of the employee-benefits brokerage business have evolved dramatically since the passing of the Affordable Care Act. Customers are looking for expertise in technology, compliance, communication, cost containment and strategy—all of which require an investment infrastructure, training and talent. That takes money and a lot of energy. The average age of an insurance broker is greater than 50. For agency owners, it is even higher. Many agency leaders are simply deciding the future is better aligned with the companies that are making these investments and have this energy.
Technology is a perfect example of an area that requires investment by brokerage firms that they may not be up to. The convergence of payroll, benefits admin and HR means employers of all sizes want a single solution to manage their employees from hire to fire. Today, companies with 30 employees are enrolling and managing their benefits, compliance and HR online. Innovations like the True Choice Private Marketplace can offer a set budget to employers with fewer than 100 employees and give the employees the freedom to choose from 20 different plan options from seven different insurance providers and every doctor in Orange County.
The risk in all this consolidation will be the emergence of technology-only solutions. For very few will the rise of technology without competent advice and market intelligence works out well. Trading technology for competent advice and market intelligence is not in the interest of most employers. Blending technology and great thought leadership to produce the outcomes your companies desire is. The mix of this talent pool and entrepreneurial chutzpah exists in your strong regional players with national affiliations. This is where we have and will continue to see the greatest amount of consolidation.
Chris Martin
President
Precept
Irvine
Recent years have seen a surge in insurance brokerage mergers and acquisitions activity. From multibillion-dollar mergers, most recently Willis and Towers Watson, to a rash of acquisitions by firms rolling up smaller brokerage operations, this is a trend that is likely to continue in the coming years.
Large, national, publicly traded brokerage and consulting firms, as well as private equity firms, are actively acquiring this year. According to an insurance industry publication, with over $100 billion in revenue and only seven firms with over $1 billion in revenue, there are thousands of broker agencies ripe for acquisition. There are a number of factors driving this surge.
First and foremost is the recurring revenue model that agencies offer. Brokerage firms drive strong return on equity, provide steady cash flow, and are relatively immune to market fluctuations. 2014 saw a volume of acquisition activity that matched levels dating back to the prerecession period of 2007-2008 and the high multiples of profit purchase prices in the same period. Also, with interest rates so low, these firms see acquisitions as a smarter way to utilize capital.
Second, the implementation of the Affordable Care Act creates tremendous complexity, and smaller brokerage firms lack the infrastructure and competency to assist their customers with navigating the complex healthcare law. Accessing the legal resources and the broader platform capabilities of national brokerage firms is an attractive opportunity for smaller brokerage firms. And larger national brokerage firms can drive organic growth through these acquisitions, which has been challenging with low economic growth. This environment creates a win-win scenario for both parties and is driving the increased acquisition activity we are seeing.
Lastly, the healthcare industry is undergoing tremendous transformation and disruption. Large insurance carriers are merging—witness the $54 billion merger of Anthem and Cigna—and health systems have also seen a huge increase in acquisition activity. Brokerage firms, which represent employers and individuals, must have the leverage to negotiate with health plans and health systems to maintain affordability for employers and employees who finance a large percentage of the $2.5 trillion healthcare spend in America. With 10,000 baby boomers retiring daily and reaching their peak healthcare utilization years, stakeholders are vying for a larger slice of the pie. Additionally, smaller firms lack the capital or expertise to evolve their business model, and this is playing a significant role in the activity that led to more than 300 acquisitions in 2014.
Not all of this activity comes without risk to the consumer and smaller agency. Choice and affordability for the consumer will be impacted by these acquisitions. Bigger does not always equate to better. Larger firms lack some of the customer intimacy individuals want when insuring their assets, property or themselves. Also, these consolidations impact the culture of agencies and cause concern among employees, customers and vendor partners.
All told, M&A activity is here to stay for the foreseeable future. Industry transformation, complexity in service delivery, and low organic growth rates will drive a convergence of large acquirers and brokerage firms that see their coming together as a solution addressing issues for both parties.
Bill Mecklenburg
President
SES Insurance Brokerage Services Inc.
Santa Ana
The words “consolidation,” “mergers” and “acquisitions” have extremely negative connotations in our society, which in many cases are well deserved. However, I believe the trend in the insurance brokerage industry is a relatively positive movement that is creating opportunities for all stakeholders.
Private equity firms and Wall Street are realizing that insurance brokerage is an attractive business. The emerging quantitative demands relative to understanding and modeling risks, combined with the historical relationship-driven nature of the business, are finally attracting strong talent into our industry. Coupled with the fact that the insurance brokerage space is known for strong and predictable recurring revenue, one can see the attractiveness of the space.
On the sell side, the demographics of agency ownership is certainly a factor in the uptick in consolidation. There is a need for liquidity because the industry is composed of a number of aging entrepreneurs who have the vast majority of their net worth tied to their business. Historically, smaller agencies were locally rooted and passed from one generation to the next, but in today’s global economy, the next generation appears to have other aspirations than taking over their parents’ business.
Because of the emerging interest of private equity and Wall Street in this space, there is an arbitrage opportunity for larger, publicly traded or private equity-owned agencies. Those firms can pay multiples of EBITDA or revenue that the small entrepreneur views as historical highs but are still lower than the valuation multiples the larger entities realize with their investors. This has created the perfect intersection to increase transactions due to high buyer demand and an aging entrepreneurial ownership population seeking liquidity, while EBITDA and revenue multiples are at historic highs.
Nonetheless, I firmly believe that there is a need for small, entrepreneurial insurance brokerage firms to exist, and I believe they will continue to thrive for generations. There are not a lot of barriers to entry in the brokerage space, so it is an attractive space for entrepreneurs. From a personal perspective, there is nothing more invigorating in business than having a close-knit group of colleagues committed to understanding and serving their customers’ needs while growing something special together. At SES, we attempt to provide a platform for people who desire to be “difference makers” at work, at home and in the community.
Ultimately, we believe work should be a place where people can have fun, be inspired and be engaged. I believe most entrepreneurs share such beliefs in some fashion, and preserving such a purpose is a powerful counter to the allure of acquisition.
Regardless of consolidation trends, there will always be a place for industry specialists to add tremendous value to the insurance value chain far beyond the scale and distribution advantages created by consolidation of larger players.
Mordy Rothberg
Founder, Chairman
Confie
Huntington Beach
Mergers and acquisitions have long been a proven strategy for growth within the insurance distribution industry.
The recent increased activity in mergers and acquisitions within the brokerage market can primarily be explained as a product of the economy and an aging insurance owner demographic. As our economy improves, capital availability has become more fluid, leading to lower interest rates and better terms. Private equity is one of the larger providers of capital and is very attracted to insurance distribution, given its steady revenue and earnings streams. This creates a larger pool of buyers (demand) and increasing overall liquidity and valuations. A more stable economy coupled with insurance owners nearing retirement (supply) helps create a market ripe for mergers and acquisitions.
A buyer will typically look to consolidation in order to strategically gain economies of scale; broaden distribution; increase product diversification or specialization; and seek better use of its capital if the opportunity risk is within a satisfactory level and can provide an expected return on investment. Success in any of these strategic endeavors is based on the quality of human capital.
Since our industry is built on and derives its income from relationships, human capital is of paramount importance. We believe that mergers and acquisitions are one of the best methods to gain qualified and proven human capital, which will be leveraged to grow market share, develop efficiencies, increase knowledge and preserve assets.
There are certain inherent risks that are difficult for a buyer to accurately determine and measure through a thorough due-diligence process. Many of these risks stem from economic changes, such as softening or hardening of premiums (market), capital availability, interest rate fluctuations and liquidity.
Other risks are associated with integration or unanticipated events and can lead to business challenges and deterioration of assets. These risks include loss of key personnel (human capital), insurance carriers or specialty markets; failure to successfully integrate service standards and/or culture; inability to enhance brand, marketing and sales; and inadequately estimating working capital needs or profit margins.
Some inherent risks, such as distribution and product changes, may occur slowly over time, which can also significantly impact asset value if not appropriately acted upon in a timely fashion.
An experienced buyer, such as Confie, can accurately identify the inherent risks associated with a transaction and structure deals or allocate resources to secure their investment.
Arthur Schuler
Executive Vice President, Managing Director
Aon Risk Solutions
Newport Beach
The recent consolidation in the insurance brokerage industry is the result of several critical challenges facing all insurance brokers, whether publicly or privately owned.
The first challenge is the need for organic revenue growth. Organic growth is, generally, defined as additional revenue generated by selling additional products and services to existing clients or acquiring new clients. This organic growth is required to meet the challenge of maintaining and/or improving margin.
The second challenge that impacts organic growth is the continuing exodus of large (Fortune 500) companies from California in general and Southern California in particular, as well as the consolidation occurring in those major companies that remain. In Southern California, we have seen the acquisition and resulting departure of several multibillion-dollar life science companies.
The impact of this consolidation within the client base in California is that our economic base of companies continues to grow into a larger and larger middle-market environment. This means that in order to meet our organic revenue growth needs, the average size and related commission/fee income of the individual client base in Southern California is much smaller. So you have to acquire more clients to make up for the revenue loss of the large clients who have left the state.
The most efficient way to meet this revenue growth need is to acquire another agency, and we have seen a lot of this activity in the last year.
There are some risks in a consolidation strategy, including the following questions: Is the culture of the company being acquired a match for the buyer? Given the cost of these acquisitions, can the buyer keep the important revenue producing and client-relationship staff of the company that they acquired? In order to cover the expense of the acquisition, synergies must be identified. Synergies are commonly defined as duplicative expenses. Commonly, staff costs are the first place you look for these synergies. Reduction in force actions, in many cases, occurs after the purchase closes. With all of these economic challenges continuing, consolidation activities will continue, both in our industry and in our customer base.
