The pros and cons of the rising tide of M&A

The pros and cons of the rising tide of M&A | Insurance Business

The pros and cons of the rising tide of M&A

The following is an editorial by Alicja Grzadkowska, senior news editor at Insurance Business. To reach out to Alicja, email her at [email protected]

Mergers and acquisitions in the insurance industry are showing no signs of slowing down. On the agency and brokerage front, 2019 saw the highest annual total of transactions in the US and Canada with 649 deals, surpassing 643 deals the previous year, according to OPTIS Partners’ Year-End Agency Merger & Acquisition Report. And the actual number of agency acquisitions is likely greater than the number reported as many buyers and sellers do not report their transactions.

The list of leading buyers is not likely to be a surprise and includes Acrisure, which led with 98 transactions, followed by HUB International, AssuredPartners, Broadstreet Partners, and Gallagher. Meanwhile, a notable trend has been the ongoing rise in private-equity buyers, which increased their share of deals to 69%, up from 67% in 2018. As a result, agency valuations keep on climbing, reported OPTIS, and there’s little to suggest that this landscape will shift significantly any time soon.

Looking at the insurance industry more broadly, the volume of mergers and acquisitions in the global space rose 10% in 2019, according to insurance law firm Clyde & Co. A study by the firm found that 419 deals were completed worldwide last year, up from 382 in 2018, while the Americas was the most active region, with 182 deals in 2019 (down slightly from 189 deals the year before).

This deal-making craze in insurance has its pros and cons. The continued growth of brokerage giants like Hub and Gallagher through M&A has left some smaller, independent firms struggling to compete. However, acquisitions also allow brokers and agencies to gain access to new expertise and markets that they weren’t in before or build out their presence in key markets. Depending on how they approach the transaction, the acquirer could leave the acquired team in place to continue managing their own business, but allow them access to resources that the larger company can offer.

But if a broker or agency leader sells their business to a PE firm or aggregator, they need to be prepared for some harsh realities. Getting their house in order before moving on from the business is important if this is a leader’s plan. These types of buyers want to see a management team that can build the business and grow sales year over year, as well as develop new business lines and utilize technology to be more efficient. If the acquirer doesn’t see that in the agency, they are going to have to make decisions on whether to keep the leadership team in place, and, at that point, they control the business and can make those changes, in turn impacting the culture of the organization.

Read more: How insurance agency leaders can successfully plan for succession

On the other hand, for insurers and reinsurers who are looking to streamline their businesses and create new targeted operating models and propositions, M&A can be the right step forward.

According to Swiss Re, strategic deals help insurers to “expand expertise, distribution capabilities and geographical reach…. Increasingly too, emerging market insurers are eyeing acquisitions in advanced markets as a way to diversify geographically and across business lines.” Another key theme in insurance M&A has been “divestments of closed blocks and run-off operations,” which Swiss Re noted can be an effective way to later deploy capital into new or expanded lines of business.

On the flip side, the reinsurer found that an empirical analysis of share price developments of insurers involved in an M&A suggested a wide range of success across transactions. While the deal can bring forth synergies between two companies, it likewise means taking operational and business risks. Meanwhile, for agency and broker partners, insurance mergers can mean a revolving door of carrier contacts as well as a consolidation of markets. Navigating that constantly shifting insurance landscape can be a challenge for brokers and agents who are striving to bring the best insurance coverage to their clients.

In fact, M&A is often one of the first things that comes to the minds of brokers and agents when I ask them about the key challenges in the insurance industry impacting their work.

“From mergers and acquisitions of our customer base of retail agents, mergers and acquisitions of our competitors, new competitors coming into our area or perhaps [leaving], or current ones acquiring new capabilities, the landscape of the insurance industry as a whole is constantly changing,” said Tom DeCotis, CEO of DeCotis Specialty Insurance.

While they can do little about big players’ M&A moves, when brokerages and agencies are crafting their own merger and acquisition strategies, they should keep in mind the wise words of Brown & Brown Insurance’s chief acquisition officer J. Scott Penny: “The best deals ensure that one plus one equals three, or even more. If that isn’t true, don’t do it. Keep in mind the interests of your shareholders, teammates, customers and carrier partners, and develop a clear transition plan with all of them in mind.”