Mergers and Acquisitions: Catalysts for Growth in Insurance Brokerage

Current M&A Trends in Insurance Brokerage

The insurance brokerage industry is highly fragmented, presenting significant opportunities for mergers and acquisitions. Major players like Marsh & McLennan, Arthur J. Gallagher & Co., and AON are actively pursuing M&A to consolidate resources and enhance market share. The competitive landscape for high-quality businesses remains intense, driving ongoing consolidation efforts.

"First, I'm wondering whether there is a difference in the market share gain potential when you're in a rising rate environment and the enormously fragmented brokerage world includes a lot of companies that just don't have the resources to help clients manage higher insurance costs as successfully as a company with Marsh's resources." --- (MMC, earning call, 2024/Q1)

"We are also capitalizing on the tremendous opportunity to grow through mergers and acquisitions.The global insurance distribution space remains very, very fragmented and it's estimated there are tens of thousands of agencies and brokerage firms across our major geographies, the U." --- (AJG, event transcript, 2024/06/25)

"Subsequent Events On April 25, 2024, the Company completed its acquisition of NFP, a leading middle-market provider of property and casualty brokerage, benefits consulting, wealth management, and retirement plan consulting, with more than 7,700 colleagues." --- (AON, sec filing, 2024/Q1)

"That's why we focus on diversification across lines of coverage, geography, industry, and customer segment as these drive our consistently strong and industry-leading financial performance.Lastly, the M&A marketplace remained competitive for high-quality businesses." --- (BRO, earning call, 2024/Q2)

"First, I'm wondering whether there is a difference in the market share gain potential when you're in a rising rate environment and the enormously fragmented brokerage world includes a lot of companies that just don't have the resources to help clients manage higher insurance costs as successfully as a company with Marsh's resources. How much of a difference does that make?" --- (MMC, earning call, 2024/Q1)

Strategic Motivations for M&A Deals

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"And so we see that rule is having a little impact, really, on our M&A strategy." --- (AJG, earning call, 2024/Q1)

"These investments will help strengthen our strategic position and sustain top-line growth." --- (MMC, earning call, 2024/Q1)

"Our ability to invest there is important. Don't forget the analytic investment that's needed as well to be able to provide the insight around how to strategically manage those risks and ultimately match capital to that risk." --- (AON, earning call, 2024/Q2)

"Gijsbert van de Nieuwegiessen stated, "After four successful years of strategic partnership with Aquiline, we have found a forever home in Brown & Brown."" --- (BRO, press release, 2024/07/29)

"Michael Ward: Okay. So maybe if I'm thinking about it right, that – this dynamic should help bolster you in terms of, I don't know, having extra leverage in the M&A scenario if rates are cut." --- (AJG, earning call, 2024/Q2)

Integration Challenges and Best Practices

Effective integration in insurance brokerage M&A involves meticulous planning, leveraging company culture, and focusing on employee experience. Initial steps include connecting products and capabilities, while maintaining competitive compensation and investing in technology and human resources to enhance operational efficiency and client service.

"Eric Andersen: So in the planning process leading up to the close and then in the 90 days since we've closed, we've put a significant amount of work to connect them first with products and capabilities because I think that's the easiest thing to get started with." --- (AON, earning call, 2024/Q2)

"Our culture is not just a differentiator, it’s a competitive advantage. It attracts the right talent to our organization and the best merger partners and enables us to build enduring relationships." --- (AJG, earning call, 2024/Q1)

"If we all remember the great resignation back coming out of the pandemic, which drove a lot of labor shortages and really created a lot of demand for projects with clients as they were trying to think about the rewards and how to pay people to keep them retained, the skills that they might need if they had to pivot, because they didn't have the right resources, and also starting to think about transformation as they were having less resources to work with, and there was innovation in technology, as we've all talked about AI, in the past and helping clients through those." --- (MMC, earning call, 2024/Q1)

"That focus makes the employee experience and competitive compensation plans very important. And our professionals are well equipped to help employees put together solutions that align with client goals of employee retention." --- (AJG, event transcript, 2024/06/25)

"That would be another fantastic year. As I look ahead, the business is in great shape and should continue to benefit from our investment in new claims resolution managers, the addition of new tools and technology that enhance and further improve the claims experience." --- (AJG, status update, 2024/06/25)

Financial Performance Post-M&A

NFP's 14 acquisitions in 2024 have generated $36 million in annualized revenue, with expectations of $45-$60 million in EBITDA for the year. AJG reported a $0.01 EPS increase and anticipates lower depreciation and amortization. AON noted modest positive impacts from M&A services, with a strong and growing pipeline.

"M&A engine. Since the beginning of 2024, NFP has completed 14 acquisitions at attractive multiples weighted towards commercial risk and health, representing $36 million in annualized revenue. As we previously communicated, we expect NFP to do M&A comprised of $45 million to $60 million of EBITDA per year, and they are on track for the full year 2024." --- (AON, earning call, 2024/Q2)

"The net impact to non-GAAP results is about $0.01 to EPS this quarter. Going forward, we are now expecting a lower level of depreciation and amortization as a result of that M&A valuation report. Turning to the Corporate segment on Page 4, no change to our outlook for the third and fourth quarter." --- (AJG, earning call, 2024/Q2)

"And while we're starting to see the turnaround in external capital markets, our M&A services business had modest positive impact in the quarter, although the available pipeline remains strong and growing. For NFP, growth for the two months was consistent with our North American business." --- (AON, earning call, 2024/Q2)

Regulatory Considerations and Challenges

Regulatory changes present significant challenges in the insurance brokerage industry, impacting both market positioning and client services. AON highlights the importance of navigating these changes to maintain leadership and manage risks, particularly in areas like pension risk transfer and capital management.

"We have an incredibly strong leading position in that. You're seeing that play through, the regulatory challenges and changes." --- (AON, earning call, 2024/Q2)

"In Wealth Solutions, organic revenue growth of 4% reflected strength in retirement as our teams continue to help clients reduce risk through pension risk transfer and manage the ongoing impact of regulatory changes as we continue to bring leading capabilities to help clients match risk and capital." --- (AON, earning call, 2024/Q1)