Insurance Broker M&A Shifts Toward Integration and Organic Growth
Brokerage acquisitions are facing a higher bar as softening commercial insurance prices put more weight on organic growth and higher interest rates sharpen the need to integrate acquired firms. Technology spending adds another pressure: it may make scale more valuable while prompting some smaller brokers to consider a sale.
That shift marks a change from the acquisition model used by many private-equity-backed brokerages over the past 15 years. Buyers often let acquired firms operate with considerable independence, said John Wepler, chairman and CEO of MarshBerry, based in Woodmere, Ohio. Speaking this week at the Insurance Leadership Forum, sponsored by the Council of Insurance Agents & Brokers, he said brokerage valuation multiples have stabilized as the cost of capital has risen.
“The thesis of, ‘We’re going to acquire your business, leave you alone, not run a press release, not change your name, not integrate your systems, not change your compensation,’” is changing, Mr. Wepler said.
Integration is also a priority for EPIC Insurance Brokers & Consultants, CEO Steve Denton said. Buyers increasingly expect to bring acquired operations into their systems and structures. That transition has helped drive what Mr. Wepler called a “great migration” of producers and executives leaving consolidators for other brokers or starting firms of their own.
Organic growth separates valuations
With commercial insurance pricing softening, buyers are paying closer attention to a brokerage’s ability to grow without acquisitions, said Phil Trem, president of MarshBerry. Top performers can still deliver double-digit organic growth, he said, while average growth is declining. The widening performance gap is feeding into valuations.
“Organic growth is becoming the ultimate differentiator,” Mr. Trem said.
Trucordia has built its business through about 300 acquisitions and is now bringing those operations together around centralized agency management systems, insurer relationships and a shared brand, CEO Felix Morgan said. The aim is to establish a common operating base for delivering more services and resources.
Having reached greater scale, Trucordia is being more selective about further deals. Mr. Morgan said he rejected about 90 of the last 100 potential transactions he reviewed. He said prospective acquisitions need to add geographic reach, specialty expertise or another clear fit.
“I’m particular about who we’re bringing in,” he said.
McGill and Partners is taking a different route. Its five-year business plan assumes no acquisitions, founder and CEO Steve McGill said. EQT, the specialty brokerage’s new private equity investor, would support a deal if an attractive opportunity emerged, but the threshold is high.
Technology changes the scale equation
Technology budgets can widen the resource gap between large and small brokers, Mr. Wepler said. A brokerage with $1 billion in revenue spending 5% on technology has $50 million to invest; one with $100 million in revenue at the same rate has $5 million. He described the difference in potential digital progress as “like a quantum-like multiplier.”
At the same time, better technology can make businesses that were once less attractive easier to absorb. EPIC had previously been less interested in agencies with substantial small-commercial books, Mr. Denton said, but its systems now let the company handle that business more efficiently and add volume to its existing platform.
Smaller brokers are also facing rising technology and capital demands, which may make some more open to a sale, he said. EPIC parent Galway last recapitalized at the end of 2020, with Harvest Partners as lead investor. Galway is building for the future and expects to have options, Mr. Denton said.
“We are not in the market, but there’s probably a window in the next 24 months where that will become more prevalent,” he said.
The near-term test for consolidators is whether they can turn acquired scale into integrated operations and sustained organic growth. Technology may support both, but the valuation divide is likely to favor firms that can show results beyond deal volume.