Come Together
If you suppose you’ve seen extra headlines than regular recently about insurance coverage businesses being purchased and bought, you’re not mistaken. In truth, 2021 was the fifth straight record-setting yr for M&A exercise in the insurance coverage world. The causes vary from federal fiscal traits to a want to broaden an company’s experience; from pandemic fatigue to the growing older of the Baby Boomers who constructed and grew many of those companies. The thought, space leaders say, is to develop strategically, with customer support and firm tradition at entrance of thoughts.
HUB International isn’t any stranger to mergers and acquisitions in the insurance coverage world; they’ve lengthy been a key ingredient of the firm’s progress, nationally and globally.
“For us and some of the bigger acquirers, we’re getting more laser-focused in what we do,” stated Timm Marini, president of HUB International New England. “It used to be you acquired to develop — and develop profitably. And then it grew to become geographic enlargement, the place you wished to discover some businesses in locations the place you weren’t.
“In the last 18 to 24 months, it’s gotten more laser-like,” he went on. “When I say that, I mean looking for specialists or looking for specialty shops that may bring in different disciplines, like medical malpractice, life sciences, startup companies, or financial services. In the last two years, we’ve acquired 50 investment firms across the country, four or five of them in New England alone.”
Still, even at a agency with that type of report, the sheer tempo of M&A exercise lately has been hanging, Marini stated. Last yr, a report 798 insurance coverage businesses had been bought in the U.S. — breaking the earlier information of 711 in 2020, 653 in 2019, 580 in 2018, and 557 in 2017.
“Part of that was the pending increase in taxes — people were nervous the tax rate was going to go up significantly, and that may have given some of them the impetus to sell,” he famous.
Phil Trem, president of Financial Advisory for Marsh Berry, a number one M&A advisory agency for the insurance coverage trade, famous the similar dynamic.
“The heightened activity can be traced back to a number of different factors. Firms who sold believed that they might be negatively impacted by a potential federal capital-gains tax increase and a shift in expectations by the insured community,” he wrote on the agency’s weblog. “While tax legislation was not enacted in 2021, there are still looming concerns that it could happen at some point in 2022. Will it be retroactive? Anything is possible, but at this point concern about a significant tax increase has waned.”
But different components have been in play as effectively, Marini stated. “I also think there’s some COVID fatigue in the marketplace, folks dealing with all the extra issues we’ve all had to deal with. Plus, honestly, the multiples folks are paying for these companies are significant.”
John Dowd, president and CEO of the Dowd Agencies, agreed, calling the present panorama a “feeding frenzy” marked by “irrational exuberance” on the a part of consumers. “We look at what’s a good fit, what’s a fair price. We’re not going to chase.”
Dowd, whose personal agency has made some key additions not too long ago (extra on that later), sees a demographic shift in play as effectively.
“Baby Boomers, who built this modern-day economy and have been a powerful force in every industry across the country, have been retiring to the tune of 2 or 3 million a year. That obviously includes every segment of the economy, including insurance agencies,” he famous. “A lot of agency owners have reached the point of retirement, and if they don’t have an internal succession or perpetuation plan in place, they might look to sell to somebody. That’s what’s going on out there.”
“A lot of agency owners have reached the point of retirement, and if they don’t have an internal succession or perpetuation plan in place, they might look to sell to somebody.”
As for that feeding frenzy, Dowd and Marini each famous that businesses are being bought for multiples of the EBITDA (earnings earlier than curiosity, tax, depreciation, and amortization) valuation components that might have been unusual only a decade in the past.
“Our business models haven’t changed, so why have these multiples suddenly gone so much higher?” Dowd questioned. “It’s causing people to maybe sell sooner than they had planned, thinking the multiples will go away sometime, and they don’t want to miss out on an opportunity to monetize their asset.”
Pathways to Growth
There are two methods of rising an insurance coverage firm, Dowd advised EnterpriseWest. One is natural.
“That’s what we do every day, trying to attract more customers and certainly hold onto and retain those we already have,” he stated. “Then there’s growth through acquisition. Our philosophy and strategy is to do both. Any business plan is going to focus on growth, profitability, and retention. When you put together your growth plan and have a healthy balance of organic growth and growth through acquisition at a pace you can accommodate and not stress your staff and your balance sheet, that’s what we consider a good, strong, healthy philosophy for growth.”
Marini stated HUB has made focused investments in niche-specific expertise as a manner to higher serve prospects, however has additionally not shied away from buying good-sized companies in the area — like the Insurance Center of New England in 2019, a transfer he known as a powerful “cultural mesh” at the time, related to the one HUB discovered when it acquired his former agency, Field Eddy, 5 years earlier.
Over the previous yr or so, the Dowd Agencies acquired two native businesses, J. Raymond Lussier Insurance and Wilcox Insurance Agency, citing the same cultural match.
“When I talk about a good fit, it’s book of business, carrier representation, geographic location, and, most important, cultural fit,” Dowd stated. “By that, I imply, are the present house owners sharing the similar philosophy that we now have when it comes to how they deal with purchasers and how they deal with workers? When there’s an excellent match in these two areas from a cultural standpoint, we are able to start to transfer ahead with analyzing the proposal that’s on the desk.
“Not every prospective agency is a good fit for acquisition,” he went on. “We know the metrics we look for, and we have to check the boxes before we start to move forward. We can’t grow for the sake of growing; we have to do it incrementally and selectively. That’s our philosophy. We see people out there acquiring agencies all over the place; they’ve got their own philosophy, and we have ours.”
Elaborating, he known as Lussier and Wilcox good examples of sturdy cultural suits. “We’ve recognized these house owners for years. We know the way vital a precedence their prospects had been. It was essential to these house owners that their purchasers, who they labored very arduous to construct over the years, are going to be effectively cared for by the new house owners, handled equally and revered and serviced at the degree they’d change into accustomed to.
“The build-versus-join decision is bringing a lot of firms to the deal table. This dynamic is not going away, and the market will likely continue to be very robust.”
“The proof is in the pudding,” Dowd added. “Lussier got here on a yr in the past, and Wilcox was six months in the past, and they’ve blended superbly with our workers. We’ve had some get-togethers as a workforce the place everybody will get to meet and know each other.
“That careful vetting is really important so there’s not any disruption to service to clients, that it’s seamless and smooth, and everyone is comfortable,” he went on, “because people get anxious when there’s change. It’s natural. To the extent we can, we want to address and dispel those concerns before, during, and after the transition. And it’s worked well.”
A bigger company with a broader vary of particular experience is vital to prospects nowadays, Marini stated.
“Customers are demanding more service for the same dollar amount,” he famous. “And then, industry experts who know the nuances of different coverages can negotiate better premium deals with their carriers.”
It’s a win-win, in different phrases.
“One major driver of sellers coming to the table is evolving expectations of brokers’ clients, the buyers of insurance,” Trem wrote. “Since the starting of the pandemic, insureds have created an expectation that their dealer act as a guide, not simply somebody who helps buy insurance coverage coverages. The finish shopper is searching for somebody who may help present strategic steering, danger administration, and/or mitigation providers.
“This creates a conundrum for insurance brokers who must keep investing in tools, resources, and talent in order to effectively compete,” he went on. “Independent brokers have to decide whether they want to use their cash flow to make these investments or partner with a firm that has already done it. The build-versus-join decision is bringing a lot of firms to the deal table. This dynamic is not going away, and the market will likely continue to be very robust.”
Bigger and Better
Building broader and deeper experience in an insurance coverage company is a technique to counter the bottom-line-focused direct writers, Marini stated, particularly on the personal-lines aspect, the place they proceed to develop market share in New England. And not simply experience, however relationships.
“We don’t want to be big just to be big; that thinking was 10 or 15 years ago. Now it’s getting big to be good, or just being good … and part of that model is having independent expertise, services, and claim advocacy like never before.”
He famous that HUB has gained some nationwide awards for its COVID-related communication about how the trade ought to react and take care of all the totally different challenges the pandemic has wrought. “We’ve had some competing brokers, large companies, bigger than us, grabbing those materials for their customers. We didn’t protect it; we shared it.”
Dowd agreed that M&A exercise typically focuses on what it brings to prospects, from a broader provider combine to particular experience. While the mergers with Lussier and Wilcox targeted extra on the shared tradition, he added, any profit to prospects is an element when contemplating an acquisition.
Nationally, these mergers and acquisitions will proceed to be a serious story in the insurance coverage world. After 5 straight years of setting new information for M&A exercise, Trem doesn’t see a serious slowdown in 2022.
“Buyers and investors are continuing to push their way into the marketplace,” he wrote. “If anything, the pandemic reminded the financial community what a great investment the insurance distribution space is and that demand is greater than ever before. It is a very favorable seller’s market because there is still more demand than there is quality supply.”
Joseph Bednar might be reached at [email protected]