M&A in the insurance industry, including among insurtechs and insurance brokers, is seeing new approaches and strategies, especially with private equity firms investing in the space.
Shikha Khetrapal, former SVP, head of strategy and operations at Marsh & McLennan Agency and former COO at Vantage Insurance Partners, Inc., spoke with Digital Insurance about outcomes for insurance agencies and insurtechs being acquired, how newly acquired companies are being managed, and differences depending on the type and size of companies.
This article is from a longer interview and edited for clarity.
Do acquirers know whether they will integrate a target company or give it latitude?
They want to integrate but the messaging is still consistent with what it was five years ago, 10 years ago, that you will have complete autonomy. Nothing's going to change. But a company that is doing 50-100 acquisitions a year, they're seeing as they do acquire, that there's no way that at some point they will not integrate.
Then there is a clash, because the sellers say, 'Well, you told us nothing is going to change. We can keep operating the way we are. Now you're asking us to change our process.' People probably will have new job titles, new descriptions. This is the new workflow, you need to follow all of this. The buyers absolutely need to do this to get value, but they are not communicating that clearly or as transparently to the sellers.
When I started in insurance, there were about 35,000 agencies in the U.S. Everyone still gives that number – even though so much consolidation happens in the industry, it's still a very fragmented industry. Even if these mega brokers are acquiring these huge companies, their market share is still relatively small. For Aon, NFP is giving it a lot of clout in the middle market space. And Marsh already had MMA, and then with the acquisition of McGriff and all the other acquisitions that they've already done, it's a huge middle market presence.
Integrating these acquisitions is the biggest challenge I see now. They can provide the resources and data analytics, but if not integrated properly, they will not provide any value, because you don't want your talent to leave. You don't want clients to leave. Integration is always a risk with any size acquisition, but when you are acquiring these billion dollar acquisitions, the risk is too much amplified. That integration is going to be a very key piece of what these companies need to focus on.
Is retention the most important factor to make these deals work out?
Why am I acquiring a company? Either I want to expand into a new geography, increase revenue, or get more scale. I want to get talent. I want more producers. I want more account managers. I want new products. Maybe the seller has a specialty in healthcare or real estate, or something that my existing firm doesn't have. What's the strategy besides just piling on revenue?
My valuation as a buyer depends on growth and EBITDA. The growth is either writing new business, which comes from good producers, or hiring good new producers, making the investments or acquiring producers through an acquisition. And how much I am retaining my existing clients.
For example, middle market personal lines. If someone is selling me home insurance or auto insurance, that's a very transactional line of business. Retentions in that are typically low 80s (percent), if a company is doing a good job. Commercial lines, if you're doing a good job, is low 90s. In middle market personal lines, you have to keep writing new business, because you know that you will lose 20% of your book. You have to write at least 20% new business to maintain, and to grow, you have to do more than that.
Sales velocity, which is how much new business you're writing, and how much revenue you're retaining defines your growth.
How do mergers involving agencies and those involving large carriers differ?
The focus for brokerages is partnering with insurtechs to implement those technologies in existing processes or to redo the workflow. Brokerages are not focusing on buying insurtechs, but partnering – using their technology to improve processes and get more efficiency out of the existing operations.
The brokerage space is more focused on acquiring additional brokers and agents to expand geography, talent or products. For middle market brokers, even those with $1 billion or $2 billion in revenue, they're focused on growing through additional brokerage acquisitions, rather than insurtech acquisitions.
What's the outlook for M&A in the insurance and insurtech space?
I am looking forward to how these mega deals get integrated. Typically if I'm integrating a deal which is $5 million to $10 million in revenue, I would estimate an integration timeline around nine months, because there are many different aspects of integration that go into it. You have to consolidate systems. You have to make sure HR policies are consistent. You have to make sure licenses and carrier contracts are consistent.
When integrating deals like
On the private equity side, I'm looking at organic growth. We've seen a lot of M&A. The brokers in the middle have had 50 to 75 or 100 deals per year. They will probably slow down M&A a little bit and focus more on organic growth, really focus on that client retention, and see what the book really looks like once they peel back acquisitions and see what they have acquired and what it looks like.
Has this been a boom that is now tapering off?
The cost of capital has gone up, so private equity has much higher hurdles. To invest in M&A, implementing new technology or opening an office in a new geography, I have to justify return on investment.
Initially, if I could raise money for dirt cheap, then I could do probably everything. Now I can't do everything. I can still do anything. I just can't do everything. We have to prioritize – do M&A, or implement a new AI solution. ROI discussions have become really prominent.
Private equity used to be, just get to scale and acquire and we'll worry about integration later. Now, they are demanding integration. They want to see clean operations. They want to see, what industries do you write this business in, what specialties do you have? Who are your top 10 producers? Who are your top 10 clients? They want all of this information, because without that, no private equity firm is coming in and doing a recap, because they just don't have clean data to understand what is in the book.
To sell strategically or to a private equity firm, existing operations need to understand their own KPIs – top clients, top producers. This is an aging industry.
