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Insurance industry consolidating

By Frank Goad

For the past decade – the last three years in particular – increasing numbers of insurance companies and agencies have been part of merger and acquisition deals. In a classic “big fish eats little fish” consolidation scenario, smaller independent agencies and companies are being gobbled up; larger ones are merging with other firms, and some are then using their new buying power to acquire other enterprises.

shutterstock_179538548The insurance sector regularly finds fresh specialties to develop, and it consolidates. The Kentucky companies doing deals range from two- or three-person independent agencies to insurance brokers and re-insurers with hundreds of employees.

Neace Lukens, a Louisville-based brokerage firm, has been the busiest in the state market and now has over 150 agents and 650 employees in more than 30 offices. One of the first moves in its recent flurry came in early 2011 when it bought the Keen-Plamp equine insurance agency in Louisville, which had built a nationwide book of business since 1927.

Neace Lukens itself was then acquired by AssuredPartners of Lake Mary, Fla., but for the time being kept its well-known Kentucky nameplate until the middle of 2014 when it rebranded as Assured Neace Lukens.

In a smaller mid-2012 deal, Neace Lukens added Morehead Insurance with its staff of five in Scottsville, Ky., population 4,500 people. That transaction was sandwiched between the purchases of Benefit Concepts Inc., an Indianapolis employee benefits consulting firm, and First Carolina Risk Management Advisors of Charleston, S.C.

Last year, Neace Lukens acquired 117-year-old Buckley & Co. of Lexington, an independent agency writing personal and small business insurance and life, health and employee benefits insurance. Early this year it bought up 31-year-old Creech & Stafford Insurance Agency with 18 employees in Lexington and Hazard.

Neace Lukens made nine acquisitions in 2012, finishing off with Columbia, S.C.-based lumber and forest product specialist Davis-Garvin Agency, then began 2013 by buying Schroeder Agency of Rushville, Ill., with 80-plus years experience in personal lines and property and casualty insurance.

The 2012 deals included a Fort Wayne, Ind., employee benefits and consulting group. Perhaps most significantly, it acquired Arison Insurance Services of Louisville, a major full-service brokerage with business in health, life, dental, vision, disability and Medicare supplements.

Consider it an investment

Sometimes the companies acquiring insurance operations are not primarily in the business of selling insurance but, instead, are capital investment firms. For instance, Branch Banking & Trust has bought or merged with 20 insurance agencies since the beginning of 2007. However, the Charlotte, N.C.-based financial services giant’s business now includes a wide range of insurance products.

AssuredPartners, the parent of Neace Lukens, is a “portfolio company” of Chicago-based private equity firm GTCR.

There were complex financial connections when Brown & Brown of Kentucky acquired Agency Management Corp. and its affiliate, Recreational Protection Management Inc., both of Bradenton, Fla., to improve the operations of its National RV Center in Tampa. Brown & Brown of Kentucky controls the Tampa center plus locations in Albany, N.Y., and Simi Valley, Calif., from its headquarters in Columbia, Ky. Its parent company, however, is Daytona Beach recreational vehicle insurance specialist Brown & Brown.

How pervasive is the insurance M&A trend? A variety of firms are adding M&A sections to their operations and the transaction level only seems to be growing. Through June 20 of this year, The Insurance Journal reported 160 U.S. insurance M&A deal announcements, a 19 percent increase compared to the 134 deals during the same period of 2013.

Business intelligence provider SNL Financial, counted 34 insurance underwriter deals through June 20, and 126 announcements in the insurance broker sector. Across the insurance industry, consolidation is continuing at a rapid pace.

Family situations often an M&A factor

The reasons companies allow themselves to be acquired or look for a buyer vary widely. Market pressures, the state of the economy, the increasing costs of running a business and the ever-increasing amount of regulations small businesses must navigate are but a few of the reasons.

Independent agencies (unlike captive agencies like State Farm, Allstate, etc.) often are a longstanding family business. An owner may be ready to retire but have no heir interested in insurance and willing to keep the family business active. By the same token, the turnover in insurance sales people is rather high. The burden of training new sales folk only to see them leave in a year or less is heavy indeed for agency owners.

Insurance companies also have their minimum requirements.

“(Insurance companies) need to be fed, too. They have premium requirements, and, in order to maintain contracts (for different lines), smaller agencies can have a tough time meeting those goals if they want to hold multiple contracts,” said Bryan Raisor, managing director for Neace Lukens’ Lexington market. “Partnering with a larger firm gives them access to more markets, capabilities and the ability to potentially go after larger, more complex accounts.”

But M&A deals include non-financial elements, too.

“This isn’t just a business of dollars and cents – when we look at a potential company, we look at other factors such as, are they a cultural match for our company?” Raisor said. “They also want to know that what they’ve worked hard to build won’t disappear when they sign on the dotted line. We consider our company to be a family business, just on a larger scale.”

Perhaps the most poignant situations concern agencies that have been in a family for 100 years and were started by a present operator’s grandfather. The person now carrying the flag is ready to put it down, retire and enjoy the fruits of their labors – or is simply tired from having spent decades in a highly competitive business. The decision to sell sometimes hinges on children or other relatives who could take over but have no interest in the insurance industry.

And what about the employees?

Additionally, there are non-family employees to consider – if possible. Many owners have a hard time selling because of loyalty to their staff. They know that selling or merging can result in layoffs, and that is a difficult hurdle for them.

Often, though, the new company has a place for most or all of the employees. When Wells Fargo completed its sale of 40 regional insurance offices to USI this year, about 750 Wells Fargo employees were offered jobs with USI, which added 10 jobs as well. Wells Fargo kept 55 insurance locations in larger markets that generate more than 90 percent of brokerage revenue.

It’s fairly common for the parent companies to take a somewhat hands-off approach with firms they buy. The companies are often well-known in the community, and capitalizing on that brand’s goodwill is simply good business.

“In most cases, when USI buys a company, we allow them to continue to operate like an independent agency,” said John Meehan, CEO of the mid-South region of USI Insurance Services. “Our goal … is to help make them better in every aspect of the business. That way, the customers are even better served and the associates are more successful.”

All companies want successful associates.

“There’s a huge competition for talent, too,” Meehan said. “Thirty years ago, the insurance companies had schools, and they would bring in neophytes and train them. We would allow them to use and train them for five years. Then they left, became agents and brokers and maybe the company’s competitors. Talent is hard to come by, and economic growth in this business is slow. So an acquisition may be a growth strategy or talent acquisition.”

Online vs. down the street

shutterstock_133970144Just as the marketplace is adapting to the new reality of Internet commerce, the insurance industry is, too. Consumer and personal insurance sales have been moving online like most products and services, despite the lagging sales of hard goods. Insurance sales has always been a very, very competitive business, and the addition of Internet-based sellers makes it that much harder for smaller agencies; likewise, it puts pressure on agencies that represent companies without a strong online presence, or that advertise.

For instance, Overstock.com started selling insurance in 2014. The Internet retailer said in a press release that it only made sense to add that product because it has long sold household items to its customers.

On the other hand, the Internet is bringing new opportunities, too, and allowing firms to capture a unique niche. For instance, sales of cyber insurance – a recently created category – rose by 21 percent in all industries in 2013. Especially in light of the billions of passwords that have be pirated, all signs point to 2014 having even higher sales, according to a Marsh Risk Management Research report.

Another wrinkle is the rise in specialty insurers.

“The church we attend gets its insurance from a firm that specializes only in churches,” said Jeffrey Briggs, a local State Farm agency owner said, “We write commercial insurance, too, and we’re competitive; but since they do only one thing, they know every aspect of that business and are able to give customers excellent service. I think that, to be competitive, you’ll see more specialty firms in the future for commercial insurance.”

Commercial insurance still remains almost exclusively in the realm of person-to-person transactions, if only because of the complexity of insuring businesses; industry experts see that change coming, too, albeit much more slowly.

Price as a prime motivator

Where price is a key driver in a market, mergers may be necessary in order to build up the critical customer mass necessary to cut costs to a competitive level. Salaries and benefits are still an insurance company’s main costs.

M&A activity also can create critical mass for distribution channels within an insurance organization, or open new channels to diversify distribution. M&A activity is a “ready made” way to diversify one’s business in many other ways – geographically, by product range, target market, etc. – to protect to some extent against the effect of cyclical demand, and the impact of changes in areas such as tax, legislation and employee benefits.

What does it take to succeed?

Smaller agencies are having a harder time remaining competitive, Meehan said, due to increasing costs and learning how to best use new technology.

“Some of the pressure on the very small agencies comes in on the cost of technology,” he said. “To stay competitive, an agency has to rely on technology. If you want to stay current, investing in technology takes a lot of money.”

Smaller agencies are under constant pressure.

“The lifeline of small agencies is the ability to represent several companies,” Meehan said. “As insurance companies may have changed their distribution model, they may have gone from 100 independent agencies that represented them to 30. Of course, they’re going to keep the 30 most profitable. That puts increasing pressure on those smaller firms.”

Some agencies have acquired other firms for their employees skills and experience. As in so many other financial industries, the level of expertise needed to ensure compliance and profits is more critical than ever.

Technology is a key factor because the insurance industry relies so heavily on it to assess business. That requires people who understand “big data,” how to gather it, catalog it and use it.

Other reasons for acquisitions and mergers include increased market share and access to new markets, and ready-made frameworks to enter new insurance fields.

While the insurance industry takes its time changing, it is changing nonetheless. The consumer markets are moving to larger commercial avenues just as they always have. Commercial insurance is taking an even slower path than consumer insurance, but it will get to the same destination.

Frank Goad is a correspondent for The Lane Report. He can be reached at [email protected].