Analysis: Insurance brokers back at M&A game to find growth

BANGALORE (Reuters) - Large insurance brokers are snapping up smaller regional peers as soft insurance pricing weighs heavily on their top line amid stiff competition.

The insurance brokerage industry helps commercial clients find insurance coverage for a wide range of risks. However, pricing issues are nipping their revenue base, forcing them to take the acquisition route.

With No. 2 player Marsh & McLennan Cos Inc MMC.N exploring an aggressive strategy of bulking up through smaller acquisitions, top player Aon Corp AON.N may have to dig deeper into its wallet to retain its market position.

“I believe we will see an uptick in insurance broker M&A activity, as the market begins to harden,” Dave Simmons, the insurance mergers and acquisitions leader at Deloitte, said.

Historically, publicly-listed insurance brokers aim to buy tiny regional and community players in a highly fragmented market.

Although smaller stand-alone acquisitions do not generally impact balance sheets, a dozen such acquisitions can widen bigger companies’ reach and drive growth.

“I think there is still room for consolidation within the brokerage industry, and we will continue to see roll offs of the small and medium regional broker firms into large national players,” Simmons said.

Arthur J. Gallagher & Co AJG.N and Brown & Brown BRO.N do have a history of buying dozens of firms, but the financial meltdown forced a cut in their budget for acquisitions.

However, a flurry of deal announcements recently indicate they are returning to the table.

The fact that MMC adopted an aggressive strategy of bulking up through deals around the year acted as a catalyst for other insurance brokers to follow suit, analyst Alan Devlin of Atlantic Capital said.

“The reason it (insurance broker M&As) picked up was because MMC came out with a specific strategy,” he said.


MMC made six acquisitions in its risk and insurance services segment in 2009. It has already announced three deals this year, and completed a $218-million buyout of HSBC Insurance Brokers Ltd, a subsidiary of HSBC HSBA.L.

Smaller rival Arthur J. Gallagher has announced five acquisitions year to date, while rival Brown & Brown has announced six.

Companies like Arthur Gallagher do not even disclose all their M&A activity if the size of an individual deal is not material, spokeswoman Marsha Akin said in an email.

Similarly, Aon, which made 14 acquisitions last year, have bought 7 companies in the first quarter alone, spokesman Kelly Drinkwine said.

In stark contrast, Willis Group WSH.N was the lone insurance brokerage that grew in the first quarter without relying on acquisitions.

That underlines the importance of mergers and acquisitions for insurance brokers.

In a market where insurance pricing is still to firm, M&As becomes even more important, Morningstar analyst Bill Bergman said.


A surge in M&A activity within the sector may even draw the attention of private equity firms.

“They (private equity) will try to take advantage of changing pricing and valuation,” Deloitte’s Simmons said.

Private equity firms' interest in insurance brokers is not new. In 1998, major buyout player Kohlberg Kravis Roberts & Co KKR.AS bought Willis in a blockbuster deal and took it public in 2001.

“Marsh and McLennan and Arthur Gallagher, those are our largest companies, and it is possible that private equity could be interested there,” Morningstar analyst Bill Bergman said.

The firms may also look at the middle market like the public brokers, making smaller acquisitions and consolidating them to form a big player.

“The reason private equity companies like insurance brokers is that they are highly cash generative and they can lever up,” Atlantic Capital’s Devlin said.

Reporting by Anurag Kotoky and Jochelle Mendonca in Bangalore; Editing by Prem Udayabhanu