Brokerage

Brokers Active with Acquisitions

The number of broker M&As -- many by private equity -- "exploded" during the first quarter of 2017.
By: | April 18, 2017 • 4 min read

Mergers and acquisitions continue to be robust due to aggressive appetites for growth in the brokerage sector.

There were 358 transactions in 2016, exceeding the prior five-year average of 348 transactions per year during 2011-2015, according to the 2017 “Global Insurance Distribution and Services Sector Mergers & Acquisitions” report by Conning, an investment management company for the global insurance industry.

Alan Dobbins, director of insurance research, Conning

“There are a number of trends driving this,” said Alan Dobbins, director of insurance research, Conning. “There has been slow organic growth. There are less exposures, and flat to negative pricing in most commercial lines. It’s tough to grow profitably in that kind of environment.”

Acquisitions offer “one of the best growth options” at this point in time, he said.

Another big driver is demographics, he said. The average age of brokerage executives is 59. “There’s a large segment of that group eligible for retirement or will reach retirement age in the next couple of years.

“Close to 50 percent of them don’t have succession plans in place. That makes them attractive targets,” Dobbins said.

One-third of all transactions during the past five years – totaling 728 transactions – were by a mix of public and private equity-owned brokers, according to Conning.

“Private equity firms like the insurance distribution sector because the cash flow is reasonably predictable and it doesn’t require much in the way of capital expenditures,” said Timothy Cunningham, managing director of OPTIS Partners, an investment banking and financial consulting firm specializing in the insurance industry.

“Buyers are still being very aggressive in their valuations of prospective acquisition partners,” he said.

OPTIS Partners recently reported that agency M&As “exploded during the first quarter” of 2017. There were 178 transactions, compared to 115 in the first quarter of 2016.

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The bulk of the transactions were private-equity-backed brokers (93 in 2017, compared to 56 last year).

The PE-backed buyers involved in the most transactions were Acrisure (29 transactions), and Alera Group, a new organization that came into being with the consolidation of 24 brokerages focused on employee benefits, property/casualty, risk management and wealth management.

Alera Group, which was formed with investment from Genstar Capital LLC and brokerage assistance from Marsh Berry & Co., announced its formation in January, instantly becoming the 14th largest privately held insurance firm and the 7th largest privately held employee benefits firm in the U.S., according to the firm.

“That was an eye-opener,” said Dobbins. “I don’t recall ever seeing that number of independent groups form a large organization that quickly with that number of transactions. It’s hard to say if that’s going to be a trend.”

The other Q1 transactions reported by OPTIS Partners included 49 by privately owned brokerages, 17 by publicly owned brokerages, banks (7), insurance companies (11) and other (1).

“If you look at the industry, you are going to see a fairly significant reduction in the number of agents and brokers, maybe 15 to 20 percent, in the 10 to 15 years,” Cunningham said. “They are not going to go away. They will be absorbed into other firms.”

Timothy Cunningham, managing director, OPTIS Partners

Such consolidations will likely impact the tier of brokers below the top three of Aon, Marsh and Willis Towers Watson, he said.

For risk managers and companies without risk managers that rely heavily on the advice of their brokers, the consolidations should mean better service, advice and products, Cunningham said.

“They will have more scale, more skill, more talent,” he said. “I think it will be positive for clients. They will have more opportunities and more robust brokers with whom they can do business with.”

InsurTech acquisitions are included in the 90 insurance services transactions that took place globally in 2016, according to Conning.

Most service-related InsurTech startups focused on ways to improve customer service, better control expenses or manage loss costs, upgrade insurance technology, and assess and exploit the Internet of Things, according to the report.

Conning reported that transactions could accelerate if the Federal Reserve continues to raise interest rates, as M&A activity has benefited from historically low interest rates.

On the other hand, the consolidation pace could slow if confidence in President Trump’s policies fade and the economy weakens. &

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

2017 RIMS

Cyber Threat Will Get More Difficult

Companies should focus on response, resiliency and recovery when it comes to cyber risks.
By: | April 19, 2017 • 2 min read
Topics: Cyber Risks | RIMS

“The sky is not falling” when it comes to cyber security, but the threat is a growing challenge for companies.

“I am not a cyber apocalyptic kind of guy,” said Gen. Michael Hayden, former head of the Central Intelligence Agency and National Security Agency, who currently is a principal at the Chertoff Group, a security consultancy.

Gen. Michael Hayden, former head of the CIA and NSA, and principal, The Chertoff Group

“There are lots of things to worry about in the cyber domain and you don’t have to be apocalyptic to be concerned,” said Hayden prior to his presentation at a Global Risk Forum sponsored by Lockton on Sunday afternoon on the geopolitical threats facing the United States.

“We have only begun to consider the threat as it currently exists in the cyber domain.”

Hayden said cyber risk is equal to the threat times your vulnerability to the threat, times the consequences of a successful attack.

At present, companies are focusing on the vulnerability aspect, and responding by building “high walls and deep moats” to keep attackers out, he said. If you do that successfully, it will prevent 80 percent of the attackers.

“It’s all about making yourself a tougher target than the next like target,” he said.

But that still leaves 20 percent vulnerability, so companies need to focus on the consequences: It’s about response, resiliency and recovery, he said.

The range of attackers is vast, including nations that have used cyber attacks to disrupt Sony (the North Koreans angry about a movie), the Sands Casino (Iranians angry about the owner’s comments about their country), and U.S. banks (Iranians seeking to disrupt iconic U.S. institutions after the Stuxnet attack on their nuclear program), he said.

“You don’t have to offend anybody to be a target,” he said. “It may be enough to be iconic.”

The world order that has existed for the past 75 years “is melting away” and the world is less stable.

And no matter how much private companies do, it may not be enough.

“The big questions in cyber now are law and policy,” Hayden said. “We have not yet decided as a people what we want or will allow our government to do to keep us safe in the cyber domain.”

The U.S. government defends the country’s land, sea and air, but when it comes to cyber, defenses have been mostly left to private enterprises, he said.

“I don’t know that we have quite decided the balance between the government’s role and the private sector’s role,” he said.

As for the government’s role in the geopolitical challenges facing it, Hayden said he has seen times that were more dangerous, but never more complicated.

The world order that has existed for the past 75 years “is melting away” and the world is less stable, he said.

Nations such as North Korea, Iran, Russia and Pakistan are “ambitious, brittle and nuclear.” The Islamic world is in a clash between secular and religious governance, and China, which he said is “competitive and occasionally confrontational” is facing its own demographic and economic challenges.

“It’s going to be a tough century,” Hayden said.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]