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Brokers and Agents
A Perfect Storm

A record wave of consolidation in the agent and broker space means enhanced service—and probably higher premiums.
  • Jeff Roberts
  • July 2019
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Key Points

  • Record-breaking: The broker M&A market continues to shatter records, fueled by an abundance of low-cost capital and private equity-backed firms.
  • The Impact: The consolidation of wholesale and independent brokers means enhanced resources for insurers, but reduced choice and potentially higher premiums.
  • Demand: White-hot demand is pushing valuations ever higher and convincing even young owners to sell.

For a few hours, the rumor shook an entire industry.

Then it turned out to be no rumor at all.

Aon, the world's second-largest insurance broker, confirmed its pursuit of rival Willis Towers Watson in March after a news outlet reported its interest in acquiring the $24 billion firm.

It would have been the biggest merger ever.

Aon understood that the stakes are rising in the distribution landscape. Marsh &McLennan—the largest broker on the planet—acquired U.K. giant Jardine Lloyd Thompson Group a few months earlier in a $5.6 billion deal. And private equity-backed firms continue their buying spree.

But Aon's bid to become the biggest brokerage by revenue had leaked too early in the process. It abandoned an all-stock offer for the industry's third-largest broker the next day.

“You definitely pay attention when you see a combination of Marsh and JLT or the prospect of an Aon-Willis and what that would mean for the choice that's out there for the policyholder,” said Stefan Holzberger, chief rating officer, AM Best.

The proposed megadeal was a microcosm of the unprecedented mergers and acquisitions activity in recent years among brokerages and agencies.

The record wave of consolidation is reshaping the way insurance is purchased—and which intermediaries control and place premium.

“What we're seeing is a prolonged perfect storm,” said Timothy Cunningham, managing director of Optis Partners, a Chicago-based financial consulting firm specializing in the insurance industry.

“On one hand, you have a very well-capitalized group of buyers. On the other side, you have a pretty robust pipeline of sellers. And it's really led by the private equity-sponsored firms.”

The lasting impact of this consolidation of wholesale and independent brokers is increased specialization and resources for clients, but less choice, observers say. Economies of scale, global footprints and value-added services have emerged as differentiators separating larger firms from smaller competition—and maybe even each other.

Some predict those divides will only grow.

“We expect continued consolidation within those top-tier firms that provide thought leadership and can afford to really invest in data analytics and other resources,” said Bill Bohstedt, vice president of mergers and acquisitions for Arthur J. Gallagher &Co.'s retail brokerage operations. “We think they're going to be the long-term winners in the marketplace.

“It's going to be that much more difficult for the smaller agencies to compete in this era of specialization and data.”

The new landscape means insurers will have closer partnerships with brokers that are more aligned with their needs across diverse product lines and geographies.

But it also spells pressure to raise rates as many firms—carrying debt from their acquisitions and greater leverage thanks to controlling more premium—will seek higher commissions and fees.

Carriers likely will pass the costs down to companies seeking property/casualty, employee benefits and personal lines coverage.

“When brokers have volume, they use it to leverage their position with insurance companies,” Cunningham said. “So if it went from the 400-pound gorilla to the 800-pound gorilla, insurers might be getting more pressure to enhance commissions and give more supplementals.”

The broker M&A market continues to shatter records, fueled by an abundance of low-cost capital, rising valuations, rapidly evolving technology and the large appetites of private equity-backed firms.

The volume of transactions reached new heights in 2017 (611 transactions) in the United States and Canada, only to be eclipsed last year (631), Optis said.

MarshBerry, a consulting and advisory firm for the insurance distribution space, counted 580 announced brokerage transactions in 2018, a 4% increase from a record-breaking 557 in 2017.

And this year is on pace to surpass those totals, with deal activity increasing 30% in the first quarter year over year (161), the most active three-month period in the past decade.

“We have the highest volumes of transactions that we've ever seen as well as the highest valuations we've ever seen,” said Phil Trem, executive vice president, MarshBerry. “We're getting to a point where we can't possibly fathom them going any higher.

“It's primarily driven by pure demand. The market has been so hot for so long. There's a lot of activity from buyers, and it's causing firms that weren't for sale to at least explore what's going on.”

The consolidation leaves fewer alternatives to the Big Three—Marsh &McLennan, Aon and Willis Towers Watson.

Even well-established independent brokers such as Wortham Insurance and MHBT have been absorbed. Some were forced to sell because they couldn't compete with super-brokers boasting large geographic footprints and a wealth of resources.

“The brokers over the last 10 years have strengthened their position in the value chain,” Holzberger said. “With the consolidation that's taking place, there's still enough choice out there. There's still healthy competition.”

For insurers and their end clients, the tsunami of mergers is largely benign despite the potential for higher rates, observers say.

With increased scale, brokers will offer carriers and corporate clients enhanced efficiency, specialist expertise and value-added tools and services such as cat modeling, market analytics and consulting.

For many traditional buyers, the play is to build scale, diversify and strategically position themselves to become indispensable.

For sellers, the rising valuations in a heated market often make for offers impossible to refuse, especially for aging owners without succession plans and wholesalers facing the continued reduction of retailers' intermediary pools.

And for private equity-supported companies, the draw of 90% to 95% recurring revenue streams, impressive valuation multiples and a highly fragmented marketplace spell attractive investment opportunities.

“There's a lot of capital in the world looking for return,” Trem said. “And what I think is proven to investors is the insurance industry specifically is recession-resilient. In times when wallets are tight, people still were buying insurance.

“What investors have found is the risk profile is very low relative to other types of return that can be found in the market.”

New Landscape

Stefan Holzberger, AM Best

The brokers over the last 10 years have strengthened their position in the value chain. With the consolidation that’s taking place, there’s still enough choice out there. There’s still healthy competition.

Stefan Holzberger
AM Best

The industry is being reshaped.

Consolidation has redefined the broker hierarchy in the U.S. and beyond, with many seeking to build up the capabilities and services they offer insurers.

Carriers want partners with greater size and scale that can offer global solutions, following their own geographic footprints.

They want brokers to understand the specific niches and risks of their businesses.

And they want value-added capabilities such as actuarial services, rating advisory and loss control. But adding services is expensive—amplifying brokers' need to expand.

The ultimate objective is to provide sophisticated service for primary and reinsurance businesses and corporate clients.

“You have large, multinational corporations, and they want to have a partner,” AM Best's Holzberger said. “They want to have a broker that can wrap their arms around their global businesses, have expertise in all of the different coverages that that policyholder, that corporation, needs to have covered.

“It's a tight margin business, so the bigger and broader you are, the more synergies you can create, you can bring that overall expense load down.”

And by strengthening their relationships with insurers, brokers are building leverage.

Fund managers of insurance-linked securities are directly competing with traditional insurers and reinsurers. The influx of capital has placed pressure on rates and gives policyholders and insurers choice.

“There's a lot of rungs on that ladder across the value chain, and some risk is getting transferred directly to the capital markets,” Holzberger said.

The stronger their relationships, the less likely brokers are to be disintermediated. In return, “all the brokers—big and small—have to raise their game,” Holzberger said.

Many brokers also view M&A as a growth strategy and strategic opportunity, especially as insurers continue to reduce their distribution forces.

“They're narrowing that supply chain of independent agents because they want to really get tight with the people who have given them good, quality business and have control of that business,” Gallagher's Bohstedt said.

How do they gain further control? One way is to acquire those agencies. However, there is a downside to large-scale consolidation.

The more brokers control, the more compensation they will demand. If fees and commissions rise, insurers will have to pass that on to customers given the thin margin in underwriting results.

Meanwhile, wholesale and independent firms continue to be consolidated. Regional power Wortham was dominant in Houston, then Marsh bought it last year. MHBT was a staple in Dallas, then Marsh bought it in 2015. Barney &Barney was formidable in San Diego, then Marsh bought it in 2014.

“Some customers really want other options,” said Jack Kuhn, CEO, Global Insurance, Sompo International, in an AMBestTV panel at the 2019 RIMS Annual Conference &Exhibition in Boston. “That was one of the things that JLT played upon, was having an alternative to the Big Three.

“There will be clients that might be looking for some of that. I think that's where the unique opportunity is going to be in the distribution side. Who now fills that void?”

Startups have been emerging, such as AssuredPartners, run by former Brown &Brown executives Jim Henderson and Tom Riley. It markets itself as an alternative to the megabrokers.

And many expect regeneration by owners that sold to larger brokers and from those who opted out of working for new buyers. But it's a challenging environment.

“The consolidation at the distribution level, at the broker level is leading to a situation where it's hard to be midsize,” said Lex Baugh, CEO North America General Insurance, AIG, in the panel at RIMS.

Yet, the industry remains a producer-driven business. And as long as producers continue serving their corporate clients, those customers don't care what company name is embossed on the business card.

“The landscape has changed,” Optis' Cunningham said. “I told my insurance company friends three or four years ago, 'Be prepared. You might have 20 to 30 fewer agencies. And I think your distribution system might actually be a bit more efficient as a result.'”

A Buyer Case Study

Timothy Cunningham, Optis Partners

When brokers have volume, they use it to leverage their position with insurance companies. So if it went from the 400-pound gorilla to the 800-pound gorilla, insurers might be getting more pressure to enhance commissions and give more supplementals.

Timothy Cunningham
Optis Partners

Brokers are buying more than just revenue.

They're buying scale. Talent. And specialty expertise.

For Gallagher, growth through mergers is more than just its blueprint. It's practically a philosophy.

“This is part of our DNA,” Bohstedt said. “This is a very successful part of our growth strategy.”

It shows. Since 2000, Gallagher has acquired more than 500 companies, Bohstedt said. It made 36 mergers in 2018 and 10 in the first quarter of 2019—the most by a public broker, according to Optis.

Like other traditional brokers active in the market, Gallagher is seeking to improve efficiency, expand its knowledge base and diversify its offerings.

These factors are increasingly critical given the range of challenges facing corporates and insurers.

“As the larger firms are maturing, they're beginning to build out industry niches or verticals,” Cunningham said.

Many firms also seek to expand as threats continue to emerge in their core markets.

Premium growth and investment returns remain weak. Public companies are becoming larger, but fewer in number, while technology is reducing staffing needs—and therefore limiting demand.

And an excess of capital in the market only exacerbates that pressure.

Meanwhile, a tight labor market and industry talent gap are driving a trend to acquire “human capital,” especially young, emerging leaders.

“There is a brewing capital crisis in the insurance distribution space: The need for new talent,” MarshBerry's Trem said. “The larger organizations are struggling with the talent gap as well. They're buying people. They're buying human capital and expertise.”

Gallagher is one of those firms.

“We're buying brains, is really what we're doing,” Bohstedt said. “We're acquiring really good firms that have been successful over a number of years and have good talent—often good younger talent.”

A few years ago, Bohstedt was the only person at Gallagher solely focused on M&A sourcing among U.S. retail P/C agencies. Since then, he has added six staffers to assist in domestic retail P/C sourcing efforts.

The M&A philosophy is the same in Gallagher's employee benefits and wholesale divisions and in its international operations, said Ray Iardella, vice president of investor relations.

The Sellers

The client wasn't interested in selling.

He was only in his mid-40s and had no plans to unload his firm. But he saw the rising valuations in the industry and asked MarshBerry if he should investigate a sale just in case.

Then came an offer. The client would have needed to work into his 60s to earn what was proposed.

There wasn't much to consider. The client sold three years ago.

White-hot demand is pushing valuations ever higher and convincing even young owners and those with internal perpetuation options to consider selling externally.

“The valuations have gotten so high that it's hard to ignore them,” Trem said. “And buyers are flocking to the market.

“The demand is so aggressive that you can literally pick your solution and still get a really high value—much higher than what you likely would have seen five to 10 years ago.”

But others sell because they have no choice.

Large retail brokers have been reducing their pools of wholesale intermediaries for at least five years to control the market and push up commissions. Some have been squeezed out, as retailers pivot to larger platforms for increased efficiency and margins.

Others are selling because they're unable to afford the rising costs of evolving technology and recruiting and retaining scarce talent.

And many independent owners are approaching retirement age, opting to sell because they don't have succession plans. Thirty to 40% of brokerages and agencies are owned by baby boomers, Cunningham said.

But as the unprecedented frenzy of deals continues to spiral upward, several observers ask: Has the wave of M&A finally peaked—and will it end with a crash?

“That is the $20 million question,” Bohstedt said. “It really appeared as if multiples couldn't go any higher, and there wouldn't be more players coming in because it's so saturated. But that continues.

“At some point, the merry-go-round has got to stop.”

MarshBerry envisions not a bursting bubble but a “new normal,” thanks to private capital, Trem said.

“We don't believe values are going to drop back where they were 10 years ago,” he said, “but we do think that there's going to be some kind of market correction.”


Private Capital Fuels Broker M&A

The calls come once a week to MarshBerry.

They come once a month to Optis Partners.

The callers are private capital-supported firms looking to invest in the brokerage and agency space. Not familiar players, but new entrants.

“Things are very, very hot,” said Phil Trem, executive vice president of MarshBerry, a consulting and advisory firm in the insurance distribution space. “We have a lot of interest from firms that want to sell and a significant amount of interest from firms that are trying to buy.

“So if one or two or even five of the buyers go away just through consolidation, we don't believe it's going to hurt or impact the market.”

The M&A boom that began among PE-backed buyers around 2012 continues, even if some experts predicted two years ago that transaction volume and valuations had peaked.

MarshBerry estimates there are more than 40 well-capitalized buyers actively shopping in the marketplace. Thirty-one are private equity-supported firms—up from 25 in 2017. They produced a 9% increase to 343 deals last year, a jump from 315 in 2017.

PE and hybrid firms—brokers that are privately owned but have a debt or credit line to facilitate acquisitions—accounted for about 20% of the total M&A activity in 2008. That proportion jumped to 68% in 2018, according to Optis Partners, a Chicago-based financial consulting firm specializing in the insurance industry.


Number of private equity-backed broker M&A deals in 2018.

Source: MarshBerry

“Why does private equity love this business so much? They see insurance distribution's cash flow is predictable, and it doesn't require any capital expenditures,” said Timothy Cunningham, managing director of Optis Partners. “And when these firms get sold or recapitalized, they see the valuations that are occurring. That's a motivator.”

Investors watched Goldman Sachs' private equity affiliate buy USI Holdings Corp. in 2007 for $1.4 billion and then flip it in 2012 to Onex Corporation for $2.3 billion. And they saw Apax Partners buy Hub International Limited in 2007 and sell it in 2013 for more than twice what it paid.

Those transactions—spanning the financial crisis and its aftermath—“proved to the market” there are opportunities to reap strong return relative to the risk, even in dire economic conditions, according to Trem.

But some question if the mass acquisitions by private equity-supported firms is a positive for the industry—or for the firms that have been bought.

The availability of cheap credit has been a huge driver of capacity and financing for most of the buyers in the marketplace, observers say. Many of the sales, especially among private equity-backed firms, are heavily leveraged.

It has allowed them to be aggressive and create significant returns for their investors.

But it could make them particularly sensitive to material changes in rates or credit availability.

“Maybe it doesn't stop until somebody can't make their interest payments in the U.S,” said Bill Bohstedt, vice president of mergers and acquisitions for Arthur J. Gallagher &Co.'s retail brokerage operations. “If they don't keep doing the mergers at the rate that they're doing and acquiring the cash flow to pay for them, then that becomes a problem.”

Several purchases have been part of rollup strategies, where a private equity firm buys multiple small agencies and merges them to increase scale and reduce costs. But Bohstedt says many of the agencies do not reap the benefits of a large parent broker.

“They don't really invest in their companies in the way of resources because, frankly, they're so highly debt-laden, they have to use most of their profit to pay their quarterly interest payments,” he said.

Others wonder if the newcomers will succeed in an industry driven by known producers.

“I'm not convinced these new entrants are going to get the traction that they anticipate unless they have some really good industry bona fides,” Cunningham said. “The one thing sellers want is to partner with someone who knows the business.”

Jeff Roberts is a senior associate editor. He can be reached at

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