Some acquirers have integration down to a science, increasing speed of the process and quality of fit at acquired firms.
By Russ Banham
Leader’s Edge
From 2018 through 2022, PCF Insurance Services acquired 225 insurance agencies, cementing its status as a fast grower among the 20 largest brokerages nationwide.
It’s not surprising that PCF emphasized acquisitions during that five-year period, given the prevailing near-zero interest rates that enabled inexpensive borrowing for dealmaking. Although integrating the agencies into the parent firm’s operations offered significant cost synergies, operational efficiencies and revenue growth, PCF’s private-equity backed owners focused on the once-in-a-generation opportunity to buy, buy, buy. Other brokerages did the same.
But as the Federal Reserve increased interest rates in 2022 and into 2023, PCF and many of its peers paused the acquisition spree. PCF did 69 fewer deals last year than in 2022.
The brokerage intentionally pulled back, says new chief development officer Brooke DeWyze. “We had a philosophical change,” DeWyze explains. “We were moving so fast with so many deals, we neglected to seek the counsel of the agency partners on the value of integration. We have great partners and want to bring this value to them.”
The goal is to increase efficiencies and thus cost savings, as well as to offer greater resources to the acquired companies, by unifying back- and front-office operations and standardizing accounting processes, workflows, employee compensation plans, contracts with carriers and desktop applications.
Integration takes time, consumes resources and involves significant changes in agency management, operations and functions like information technology. While clients can ultimately benefit from the increased resources and efficiencies that allow producers more time for clients, these changes impact the way staff work, requiring them to integrate new tools, systems, job functions, and even carrier partners, which can be tough on morale and can hurt productivity. For example, while integration with a larger firm can increase the breadth and choice of carriers a producer can access for placing risk, this could also be a challenge for acquired producers who may be reluctant to end a relationship they have nurtured over many years with incumbent insurers.
The seeds to PCF’s philosophical change on integration were planted in November 2021, when management decided to buy back 70% of the company from its private equity owners. The process received another push with the promotion of CFO and COO Felix Morgan to chief executive in December 2023.
Morgan quickly hired 27-year industry veteran DeWyze to lead the firm’s acquisition and integration strategy, what DeWyze calls “M&A 2.0.” The plan calls for all of PCF’s partnering businesses to operate under its agency management system within two years.
“It’s very difficult to provide value-added services to our 250 partnering agencies without everyone on a centralized system,” she explains. “We’ve developed a methodical process to do just that.”
In a way, PCF is following in the footsteps of other top-20 brokerages like Hub International, Gallagher and Brown & Brown, which have long pursued strategic and speedy integration of acquired agencies. However, it is something of an outlier among its peers today.
Other brokerages that acquired agencies at a fast clip during the low interest rate period have reportedly yet to begin the integration process, assuming this is their eventual intent. For these brokerages, nearly all of them backed by private equity, the reasons boil down to time and effort, says Trevor Bunker, chief customer officer at Applied Systems, a large provider of agency management systems. “True integration involves unlocking customer, systems and back-office synergies; there is always a dollar sign next to those, and the immediate return is not a ton,” he says.
Resistance to change is another factor. “Not all acquired agencies are interested in fast integrations; some want to avoid it due to the uncertainty surrounding change management,” says Mike Mensch, CEO at Agency Brokerage Consultants, an M&A advisor to agency sellers.
Brokerages that don’t plan to integrate agencies immediately will typically leverage that factor in their acquisition negotiations, says Mensch. “They’ll pitch the agency owner on that point of differentiation from the larger acquirers like Hub or Gallagher that favor integration,” he explains. “Whether or not a brokerage integrates post acquisition can be a key differentiator [in closing deals].”
Acquisition Models and Integration
There are two primary brokerage acquisition models: the “entrepreneurial aggregate and roll-up” model, in which the focus is on acquiring agencies to increase overall premium volume, with integration either not planned or postponed to some future date, and the “acquire and integrate” model, in which acquired agencies are integrated the day the deal closes or soon afterward.
A third ”hub and spoke” model of agency acquisition, also private-equity backed, entails the purchase of regional brokerage firms. Each acquired firm continues to operate as an independent entity, but it is integrated quickly into the owner brokerage’s management system. Agreements on matters such as compensation with the agency’s producers and employees are standardized, and the agency typically rebrands under the corporate name within a few years. (See Sidebar: Well-Oiled Integration Machines.) Generally, these firms are entrusted to acquire additional agencies in their region.
Brokerages like BroadStreet Partners, Keystone Agency Partners and Vantage Insurance Partners apply the hub and spoke model. “We’ve built a platform that integrates all the data at our partnering brokerage into a data lake, giving us the ability to aggregate the data and provide benchmarking and other insights to drive their growth,” says Mike O’Connor, CEO of BroadStreet Partners, whose acquired brokerages are integrated into one of two systems providers, Vertafore or Applied Systems.
The expectation is for all three acquisition models to persist. “More mature buyers are leaning in on integration, whereas newer and smaller acquirers are still running with the aggregate and roll-up strategies,” says Mensch. “Integrating early improves management capabilities and avoids pain down the road, but it requires scale and integration teams. The models will co-exist for the foreseeable future.”
At some point, the process of integration will likely commence across the industry, says Chris Hughes, managing director of insurance distribution at specialist agency M&A advisory firm Merger & Acquisition Services. “Over the next year to 18 months, I think we’ll see a renewed focus among all brokerages on integration. By then, I think all the major market participants will have integration teams and plans in place.”
Nevertheless, Hughes acknowledges that, if interest rates again plummet to near zero, brokerages “will take advantage of the opportunity and become more aggressive in an aggregate strategy,” possibly relegating integration to the back burner.
Fear of Pain
Over five years through 2022, U.S. brokerages acquired 4,245 agencies, an average of 849 acquisitions per year, industry consulting firm OPTIS Partners said in its annual M&A report. However, acquisitions shot up to 1,108 in 2021 and 1,031 in 2022, much higher than the historical average. Following the Federal Reserve’s rate hikes that began in March 2022 and seemingly concluded in July 2023, the number of acquisitions fell back to 782 last year, a more normal pace.
Some companies do not appear to be in a rush to integrate their acquisitions. Acrisure, the most acquisitive brokerage annually from 2018 through 2022, acquiring approximately 100 agencies each year during the period according to OPTIS figures, appears to be taking its time. Acrisure was unavailable for comment.
Acrisure is not alone among private-equity backed brokerages that execute numerous acquisitions to build revenue yet are apparently less inclined to spend capital on integration. “There’s always some pain with systemwide change,” says Applied Systems’ Bunker, citing concerns over migrating to another agency management system and changing ways of working.
Another challenge for brokerages unaccustomed to integrating agencies is the time needed to establish a workable integration plan. “It’s hard to do this when you haven’t done it for a while,” says Andrew Wynn, CEO at Ascend, a purpose-built finance automation platform for the insurance industry. “Rationalizing all these agency systems down to one is extremely challenging.”
He echoed others’ comments about the need for a clear and compelling change-management strategy, which takes time to formulate. Best practices here involve a number of steps to prepare for changes to an acquired agency, including preparing an impact assessment, involving key stakeholders from the acquired business, and laying out the schedule for the process.
“You need a playbook,” Wynn asserts. “Agency owners are apt to be caught by surprise, under the impression they could continue doing what they’d been doing all along but now are told they’ll need to do something else, like migrate over to another agency management system. That creates the risk of people leaving.”
Bunker thinks the concerns over systems migration can be overstated. He provided the example of a client, a large aggregating brokerage that recently decided to integrate its acquired agencies to reap cost synergies and other benefits. Without naming the brokerage, Bunker says the migration to Applied Systems took 45 days, “which is not uncommon. What made it happen was great planning and a clear definition of success.”
O’Connor at BroadStreet shares this perspective. He says the data migration from an acquired agency’s former management system to Vertafore and Applied Systems “is a relatively smooth process. The APIs [application program interfaces] pull the data out and put it in our centralized database, which captures the data for analytics and other purposes.”
Moving Forward
DeWyze says a combination of careful planning, cultural alignment and diligent execution is easing the early stages of integrating PCF’s 225 acquired agencies.
Her strategic plan contains timelines and metrics to achieve the ambitious two-year integration goal, though DeWyze says she cannot discuss details. “The key to addressing change-management concerns is communications and transparency. We understand employees may be apprehensive about change. We want them to know we will take care of them,” she says.
DeWyze is conferring with each PCF partner agency to discuss “what is working and not working,” she says, “making them part of the integration process. We discuss the mutual benefits of migrating to our back-end HR, accounting, marketing, communications support, and IT. To bring them value, they need to align with our system [Vertafore].”
While some partners experience shock over having to migrate their data to PCF’s system, she says, “as we talk through it, they’re usually on board. It’s all about communications and understanding the value of integration, something Vertafore is helping us with. By keeping them engaged throughout the integration process, we build trust and reduce uncertainty. Our message is that we will work with local owners to grow their business and by extension grow the mother ship.”
DeWyze oversees PCF’s M&A team and a separate integration team, led by Scott Brown, an integration and project management specialist hired in December 2023. Previously, Brown was a senior manager of projects at cybersecurity provider Proofpoint. “Scott is clear in our vision and mission and has deployed software to track the KPIs [key performance indicators] related to the integrations,” DeWyze says.
Other acquisitive brokers take a more flexible approach to integration. For example, Highstreet Insurance Partners planned at its 2018 launch to make ongoing investments in the tools and resources that the agency’s producers would need to grow their books and do more for their clients faster. “With our [brief] history, there was no way we could have rolled everything out of the gate in the first year,” says chief operating officer Emma Riza.
Since its inception, Highstreet has acquired 168 agencies. The private-equity backed firm’s vision was that its collective partners would gradually build the best insurance agency. “As we grew in scale, we would increase our incremental investments to roll out more capabilities to the agency teams and producers,” Riza explains. “While it is different to join us today than it was in 2018, our philosophy hasn’t changed.”
Unlike PCF, which has established a two-year time frame for its partners to migrate to the Vertafore management system, Highstreet is flexible on implementation dates. As Riza puts it, “We have certain preferred systems to roll out to our partners, but there’s no quick acceleration. The pace of technology is evolving. In building a consistent, common and core infrastructure, we want to ensure the correct design first, how it would feel for the employee base and the customer base.”
This determination will help reduce the apprehension workers often feel about changes in work processes, she explains. “We’re being thoughtful about system implementation, what it looks like and how we improve over time. We feel really good about our toolkit, yet we are ambitious. We will continue to evolve and build great tools to share with our partners.”
At some point in time, every acquiring brokerage will need to develop an integration approach. “Moving forward, you probably can’t maintain an environment where you have hundreds of agencies on 50 different management systems. It will separate the winners from the losers,” says Wynn.
He adds that the brokerages “that were fast and loose in their dealmaking the last few years now have a hard pill to swallow. Everyone knows what they need to do; there are few heads in the sand. Some have developed playbooks for integration, cultural alignment and the unification of back-office services. The longer others wait to do the same makes it harder to adjust to today’s macro environment.”
Russ Banham is a Pulitzer-nominated financial journalist and best-selling author