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Insurance brokers continue to diversify where they operate and the products they offer, organically and by acquisition, to remain relevant in a competitive marketplace.
Companies generally are seeking to add capabilities that they lack.
“I think firms look to do transactions that are strategic, that give them a certain geographic or product diversity,” said Timothy J. Cunningham, managing director at Chicago-based investment banking and consulting firm Optis Partners L.L.C
“From a brokerage standpoint, I would say that diversification has largely occurred in two ways: geographically and through product diversification,” said H. Wade Reece, chairman and CEO of Raleigh, North Carolina-based BB&T Insurance Holdings Inc.
“Of course we look at geography, and we look at how we can become a significant player in each of our regions,” said Dave Eslick, chairman and CEO of Marsh & McLennan Agency L.L.C., a Marsh L.C.C. unit with a middle market focus.
“We are definitely seeing continued interest in terms of geographic expansion,” said Julie Herman, associate director of insurance rating at Standard & Poor's Corp. in New York. “The growing brokers will want to diversify and build out their platform throughout the U.S.”
Brokers also are seeking expansion through international plays.
“An example of geographic expansion would be what Gallagher's done in non-U.S. markets,” Mr. Reece said of Arthur J. Gallagher & Co. Gallagher's $940 million April 2014 purchase of Wesfarmers Ltd.'s insurance brokerage operations is one such international move.
Mr. Cunningham segmented brokers into three categories: mature publicly traded brokers, mature private equity-backed entities, and emerging private equity-backed firms.
Larger, mature brokerages, he said, have the option of conducting smaller “tuck-in” acquisitions, folding a smaller target into an existing office or operation.
Emerging firms have yet to develop the structure into which they can fold smaller deals and are more focused on assembling a network, he said.
“We are buying businesses around the world,” said J. Patrick Gallagher Jr., Gallagher's chairman, president and CEO in Itasca, Illinois. “We look for thriving businesses with similar operating cultures that expand our geographic footprint, and that offer products and services that expand or complement our existing offerings.”
“On the product side, everyone is trying to diversify” to remain competitive, Ms. Herman said.
BB&T also sees value in product diversification
“A good example there is our interest in diversifying with Crump Life. From a product set, it gives us a broader offering, and the dynamics that drive the life market are not the same as what drives the property/casualty market, so it gives us some diversification within our own income statement,” Mr. Reece said of Crump Group Inc., which BB&T bought in 2012.
Some brokers are looking to more to specialty coverage. “Brokers are acquiring specialty distributors, including managing general agents,” Ms. Herman said.
“Specialty is a trend that some of the insurance companies are following because of the rate cycle and profit pressures,” she said. “To some extent, brokers follow the trends of insurers.”
How they diversify depends on their starting point, she said.
National Financial Partners Corp., for example, has a substantial presence in benefits, wealth management, and life and retirement, Ms. Herman said, but it is light on typical property/casualty brokerage, “so their big diversification play is into property/casualty.” An example includes National Financial Partners' purchase earlier this year of property/casualty insurance agencies Weber's Insurance Service Inc. and Weber's Assurance Group L.L.C.
“Most other brokers have the opposite needs. They are heavy on commercial property/casualty and they want to diversify beyond that,” she said. “Employee benefits is the big one.”
“Employee benefits is a critically important area for us,” said Marsh & McLennan Agency's Mr. Eslick.
Technology firms that provide employee benefits services, such as Web-based enrollment platforms and human resources support systems, are also becoming acquisition targets due to rising enrollments in private insurance exchanges, Ms. Herman said.
Large brokers also are actively courting the middle market.
“If you look at the middle market, it's really one of the biggest markets in the U.S.,” said Mr. Eslick. “There are approximately 13,000 brokers in the middle market.”
Private equity-backed buyers again dominated mergers and acquisitions of insurance agents and brokers during the record-setting first half of 2015.