Combine, Consolidate, Conquer

Brokerages buying brokerages is an unstoppable trend.

By Russ Banham

Leader’s Edge magazine

Insurance brokerages had one of the most active M&A sectors in 2020, a year in which other sectors pulled back hard due to the uncertain economic climate.

Across all industries, global merger and acquisition activity fell to its lowest level since the aftermath of the financial crisis more than a decade ago. Not so among brokerages. While M&A activity paused in the second quarter of 2020, the year ended with a new record in announced transactions and an all-time high in deal valuations (the price one party pays another to buy its business)—an “epic finish,” declared insurance M&A advisory firm Reagan Consulting in its winter 2021 quarterly report.

“We’ve tracked broker and agency M&A for the past 12 years,” says Dan Menzer, a partner at M&A advisory firm Optis Partners, “and both the number of deals and their valuations have steadily increased over that period. Then suddenly it pretty much came to a halt” during the second quarter. “Every broker was uncertain where we were headed.”

Among them was Hub International, the world’s fifth largest insurance brokerage by revenue. “When COVID hit, none of us knew what would happen, so we paused on the M&A side, as did most other active acquirers,” says Larry Lineker, Hub’s executive vice president. “Once we got a better sense of where things stood, we returned to historical M&A norms.”

Small Brokerages, Big Gains

Added up, the pulsating pace of brokerage M&A activity is a historic and still-unfolding narrative of incessant acquisitions, combinations and consolidation. “This is a classic story of a highly fragmented industry with enormous opportunities to consolidate,” says Simon Porter, a partner in consulting firm Bain & Company’s M&A practice. “You’ve got three significant players at the top of the pinnacle carving up the Fortune 100, with the top two [Marsh and Aon] serving roughly 450 of the Fortune 500. You’ve got another set of players looking to get into that space and the rest assiduously working their way up the ladder.”

The primary way to climb the rungs is M&A, with private-equity owned brokerages doing most of the climbing. “Seventy percent of the deals in the sector are being generated by PE-owned players, which are by far the most active acquirers,” Porter says.

Aside from the prospect of obtaining recurring revenue from a very sticky base of clients, what else is driving the fast-paced M&A activity? One thing is the ability for a smaller agency to combine with other smaller agencies to pool their premiums and attract interest from insurance carriers that otherwise would pass on providing insurance to the small agencies, given their negligible premium volume.

Another factor is the ability to wring significant labor and administrative cost efficiencies by consolidating back-office functions across multiple agencies. “By combining processes into a single, unified system, performance efficiency typically increases at lower cost,” Porter says.

Perhaps the most compelling reason for an agency owner to sell the business, in this case to a private-equity owned brokerage, is the opportunity to make a windfall. Menzer says that, as a general rule, the seller takes stock in the buying organization, which can be worth even more money down the line than the actual transaction figure.

“They get a double bite of the apple—say, 80% in cash up front—to buy the agency and then 20% in stock that multiplies in value when private equity company A sells to private equity company B,” Menzer says. “That’s a pretty seductive inducement.”

Impetus to Sell

“If you look at the likelihood of bigger capital gains taxes ahead, the highest valuations for agencies I’ve ever seen in my lifetime, plus the fact that taxes right now are lower than I can remember, there’s ample reason for agency owners to seriously consider pulling the trigger and selling,” says Phil Trem, president of financial advisory at insurance M&A advisory firm MarshBerry. “Could things get better? Probably not. You can only wait so long before opportunity passes.”

At Hub, Lineker agrees that sky-high valuations and the realization that the present low tax environment will soon give way to higher taxes have accelerated agency owners’ interest in selling. He also cites the numbing impact of the pandemic on agency owners as another factor.

This year is expected to be a repeat for several reasons, chief among them the prospect of higher capital gains tax rates. President Biden has proposed taxing long-term capital gains and qualified dividends at the ordinary income tax rate of 39.6% on income above $1 million on top of increasing the corporate income tax rate to 28% from 21%. How that plays out remains to be seen.

“All of a sudden, agency principals are managing a remote workforce subject to mental and physical health issues, producers that don’t have the ability to be face to face building local connections and have to do everything virtually and remotely, a business that’s more vulnerable to cyber hackings, and clients worried about their employment liabilities, cyber risks and other emerging exposures,” Lineker says. “It was incredibly overwhelming.”

Then along comes a brokerage with an acquisition offer to relieve these many and varied tensions. Menzer is right—it’s a “seductive” opportunity that’s tough to ignore.

“When we’re doing an acquisition, we’re looking mostly at agencies and brokers under $10 million in annual revenue,” says Patrick Gallagher, CEO, president and chairman of Arthur J. Gallagher & Co. “That’s the bulk of candidates out there, with the 100th largest broker in the world having about $26 million in revenue. Sellers have so many choices, and valuations are up because there are a lot more buyers.

“We’ll meet with these smaller brokers, and they’re generally older people in their late 50s and 60s. They’ve built up this great asset over the years, which is commendable. But the world is getting more complicated.

“There are things, like joining a group captive or offering their clients ‘point-and-click’ cyber-risk insurance policies out of London, that they might not be able to do that we can help them with. We’re doing more than 300 cyber-risk insurance accounts in the London insurance market on an almost daily basis.”

The opportunity for agency owners to help their clients is a big part of the pitch. “We always tell the owner, ‘Here’s what we’re going to do.’” Gallagher says. “‘After you sell to us, we’re both going to visit your biggest client and tell them what they’re going to gain by joining Gallagher.’ We also tell them we want them to stay on at the firm. We know they love the business.”

Big Merger Fallout?

Big deals are nothing new in the brokerage space. Prior to the turn of this century, Marsh acquired Johnson & Higgins, then the third largest brokerage in the United States, and Aon acquired Alexander & Alexander, the fifth largest. Previously, Aon had acquired Frank B. Hall, another mega-brokerage. For a while, Aon was the biggest firm in the game, a position it will regain if regulators give the green light to its planned acquisition of Willis Towers Watson. The deal remains in regulatory limbo.

But some say the combination of the giant brokerages could produce a shakeout in talent and clients.

Incompatible cultures are frequently cited as a major reason dooming the post-acquisition success of many mergers. (AOL-Time Warner is often mentioned as the poster child of a poor cultural fit.) In the case of Aon and Willis Towers Watson, a clash could cause top executives and other employees to begrudge the other organization’s management style, making them open to hiring offers from other brokerages. “Any time you have a massive deal like Aon and Willis Towers Watson, you see good people fall out,” Phil Trem says.

Although these employees have likely signed non-solicitation agreements forbidding them from contacting their clients for a particular period of time after their departure, there is always the risk that clients dissatisfied with the merged entity will request a meeting with another broker.

The waters might be tested with Marsh, given its global size and reputation. But what about other brokerages a rung or two below? Given the market growth of the top 10 brokerages over the years, their ample capital positions, technological sophistication and equally solid reputations, are they ready to take on the Fortune 100 company’s insurance business?

“We have the resources and are already competing against Aon and Willis Towers Watson,” says Vaughn Stoll, director of acquisitions at Brown & Brown. “We’ve got brands like Beecher Carlson that are keenly focused on Fortune 1000 business. Any time there is disruption or chaos, it creates opportunities.”

Other acquisitive brokerages agree. “If the merger goes through, there’s no question that clients will fall out and matriculate to other brokers,” says Bill Nay, chief acquisition officer at EPIC Holdings, a top-15 brokerage by revenue in the United States.

John Hahn, executive chairman of Galway Holdings, a holding company for both EPIC and another broker, JenCap Holdings, suggests that other large brokerages backed by private equity capital are preparing to merge to secure Fortune 500 clients. “I won’t say who they are,” Hahn says, “but they’re looking to compete for talent and clients falling out of Aon and Willis. That stuff is in play.”

Lineker appears to agree with this forecast. “The consolidators,” he says, “will acquire the consolidators.”

Assuming these combinations are under discussion, a new brokerage landscape, with other mega-firms competing against Marsh and Aon/Willis Towers Watson, may be in the offing. In the meantime, sources concur that both private-equity owned and public company brokerages will continue to gobble up insurance agencies. “It’s amazing how many entrepreneurial new agencies pop up,” Stoll says. “I’ll do research in a particular geographic area looking for expansion opportunities and find three new agencies in different niches I didn’t know existed, with talented leadership looking to go upmarket.”

“There continues to be replenishment,” Trem says, pointing to Nationwide’s decision in 2018 to release about 1,700 captive insurance agents. Many of them formed independent agencies that have since been acquired by Hub, Brown & Brown and other large brokerages.

What goes around comes around. Small brokerages get eaten by larger ones, which then become prey to even bigger players. The biggest of the big combine and shed talent and clients to other firms, which grow larger. In this highly fragmented and always consolidating sector, the narrative of yesterday is the story of tomorrow.

Russ Banham is a veteran financial journalist and author.


Acquisitions are literally part and parcel of Arthur J. Gallagher & Co., presently the world’s fourth largest brokerage by revenue, although that may inch up a notch if global regulators approve Aon’s proposed acquisition of Willis Towers Watson.

The mega-brokerage, a Fortune 500 company headquartered in Rolling Meadows, a suburb of Chicago, began as a family-run business in 1927, not all that different from the hundreds of agencies Gallagher has acquired in the decades since. It has been a steady rise for the firm, from its incorporation in 1950 through tough competitive pressures in the 1980s and 1990s and its prescient decision to acquire 16 smaller shops in 2000, putting it squarely in the top ranks of brokerages worldwide.

The Gallagher name is emblazoned on more than 500 offices across the world today, from Sydney to Valparaiso, Indiana, to Toronto to Pune, India. The firm’s M&A strategy fueled this geographic breadth, a strategy that emphasizes cultural fit more than other growth factors. “We’re not just looking to buy a consistent flow of revenue and earnings; we’re looking for the right people,” says Patrick Gallagher, the firm’s CEO, president and chairman and the grandson of its founder.

Arthur J. Gallagher launched his eponymous firm in 1927 in Itasca, Illinois. At the end of World War II, his three sons, John, James and Robert, joined the family business. Revenues were a modest $175,000 in 1950. That changed seven years later, when the brokerage won the business of Beatrice Foods, a mega-conglomerate with such brand-name companies as Avis, Airstream, Playtex, Good & Plenty and Tropicana. Other large corporate clients followed.

In the mid-1980s, a period of declining premiums in the property and casualty sector that depressed commission and fee income at other brokerages, Gallagher recorded double-digit growth, a testament in large part to former CEO and chairman Robert Gallagher. In 1984, Robert Gallagher, Pat’s uncle, wrote down the 25 principles that have guided the firm’s ethical approach to business and people.

Known as “The Gallagher Way,” these principles seem very much in tune with the inclusive and purposeful forms of work that younger generations yearn for. They include such values as:

  • We believe in one another.
  • We’re an open society.
  • Empathy for the other person is not a weakness.
  • Interpersonal business relationships should be built.
  • We are a warm, close company. This is a strength, not a weakness.

“My uncle’s principles in that most important document resonate globally,” Pat Gallagher says. “They embody our culture and account for everything we do, including the 70 or 80 acquisitions we do each year, not all of which we announce.”

Whenever he visits a Gallagher office anywhere in the world, he always pauses to read the 25 principles, which are printed and framed on the lobby wall. “I think to myself, wow, that’s cool,” Gallagher says. “That’s who we are, and it makes me proud to be a part of it.

“Here’s the landscape when I became president in 1990: we were number 13 and Marsh was number one. The top 20 brokers included Johnson & Higgins, Frank B. Hall, Alexander & Alexander, Corroon & Black and others whose names I no longer remember. Guess how many of them are still trading today? Two: Marsh and us.”

The reason is culture. In 2020, for the ninth consecutive year, Arthur J. Gallagher was named one of the World’s Most Ethical Companies by the Ethisphere Institute. It was the only such honoree in the insurance brokerage industry.


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