What’s driving M&A amongst insurance agencies?
Here are the trends and issues agency owners must consider when assessing potential deals.
The independent insurance space is ripe with mergers and acquisitions (M&A). We’re seeing consolidation across the board, from small, medium and large agencies to aggregators banding together for resources, and owners looking for an exit strategy. Private equity is investing in some independent agencies, while owners are also looking to sell to either a third party or key employee.
Independent agents have to maintain production growth every year, and it can become more challenging each year to meet those goals and remain competitive. This creates an environment that drives M&A.
Cycle of M&A
The cycle starts as businesses want to grow and strive to exceed production levels each year. When large agencies take over medium offices, and medium agencies take over smaller ones, it leaves fewer small agencies to cater to customers’ niche needs.
When consolidation occurs in this way, customers’ needs aren’t always met at the level they are used to. They get pushed to call centers for service and don’t feel the same degree of support they had with a smaller agency. This leads to agents forming new small, independent offices to pick up those unhappy customers and provide a quality experience, which then restarts the cycle of consolidation for small, medium and large agencies.
Technology’s influence on the industry
In addition to the cycle behind the changing dynamics of the industry, technology drives M&A activity as well. Tech advances, including online resources and mobile apps, have made personal insurance much more accessible.
The next-generation consumer has influenced this shift leading insurance agencies to change their approach in order to obtain more business customers as commercial insurance hasn’t been commoditized like personal policies. Businesses still rely on the relationships developed with an insurance agent for guidance as well as any shift in needs. This creates a dichotomy between the high-tech accessibility of personal insurance and the personalized touch required for the nuanced needs of commercial insurance. While 20 years ago, we saw a 70/30 mix of personal and commercial insurance at agencies, now the goal has become 60/40 as commercial growth continues.
Creating a smooth transition
When starting any M&A activity, it’s of the utmost importance to keep customers happy. Having an experienced team in place to handle the transition is key to the success of the acquisition. Customers aren’t required to continue working with the legacy agency, so having a well-conceived plan to reach out to them and show value is vital to maintaining a good relationship throughout the transition and for long-term business. Additionally, retaining key employees from the acquired firm can help ease customers into the new firm.
Getting the right financing
The insurance business can be complex. Many lenders don’t understand how to value an agency based on its book of business. Without real estate, agencies don’t have an abundance of tangible collateral, so banks that lack previous experience in lending to this industry may not be willing to provide insurance loans. This creates a challenge for M&A aspirations. Agency owners may be able to obtain a loan based on personal assets, but that isn’t always the best option. It’s critical to work with a lender that has varied experience with these complex transactions and understands how to value and margin an insurance book of business to lend against.
Many agency owners want to either grow their business or are near retirement and are seeking a succession plan. These distinct motivations, in addition to influences from the business cycle, technology and financing are vital for agencies to consider when assessing M&A.
Related: