Building a New Paradigm: Consolidation Trends in the Insurance Brokerage Industry

By Steve Vilas, vice president – Finance and Operations, Burnham Benefits Insurance Services, Inc.

Consolidation within the insurance brokerage community has been an ongoing trend at least since the 1990s but undeniably more pervasive in the last several years, due in large part to the complexities of the Affordable Care Act (ACA) and the overall transformation of the healthcare market. In the latter part of 2012, for example, imminent health care reform compliance deadlines and increases in capital gains tax created an onslaught of mergers and acquisitions (M&A) among benefits brokers—particularly small firms selling to larger ones which were far better equipped to assist employers with ACA compliance. Though the following two years saw a decline in small transactions, insurance M&A accelerated through 2014 with an increased number of larger M&A announcements, providing enough evidence to suggest it would continue on an upward trajectory.

According to a report from Deloitte, 2015 Insurance M&A Outlook <https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Financial-Services/gx-fsi-insurance-m-and-a-outlook-030915.pdf>, eight $1 billion+ deals were announced in 2014—for a total that equaled the last several years combined—with emerging interest from foreign buyers and initiated consolidation in the reinsurance sub-sector. In volume alone, the most active sub-sector was brokerages, with 321 deals announced, placing 2014 close behind 2012—the most active of the past ten years.

With economic uncertainty and political upheaval creating disruptions across the globe, insurance regulations are far from stable, leaving the future M&A landscape still uncharted. While there’s no crystal ball for predicting the future for the insurance industry, there is a high degree of certainty that the old paradigm has permanently shifted away from long-term growth objectives as a result of a new regulatory structure, lower investment yields and excessive market capacity.

The changes that have occurred in the healthcare market over the past several years have undoubtedly forced the role of an employee benefits broker to evolve into one of an advisor. It is no longer enough to market a benefits program and help with open enrollment; employers need help navigating through plan options, as well as funding alternatives such as limited funding, self-funding and captives. They want help implementing benefits administration and human resource information systems (HRIS) that improve their efficiencies, and seek guidance with new regulatory requirements placed upon them not only by ACA but also state and local ordinances. Equally as important, they seek a trusted advisor who can educate their employees about their health and wellness options so that they become knowledgeable consumers when it comes to healthcare and health insurance. And finally, they are looking for innovative and engaging ways to motivate employees to embrace healthier lifestyles, recognizing that a healthier workforce keeps medical costs under control in the long term.

Not long ago, the mere mention of ACA invoked fear and panic throughout the brokerage industry. While it has undeniably created a complete disruption in the healthcare industry and has imposed significant regulatory requirements upon providers, insurers, employers and individuals, it has also spurred a tremendous amount of innovation: new local provider networks, alternative funding arrangements, new types of plans, technological innovation, a renewed focus on wellness and more consumer choice. Today’s progressive benefits advisors are recognizing their changing roles, embracing these changes by adding people and resources to meet clients’ rising expectations. It’s an expensive proposition but one by which brokers are achieving tremendous growth. However, not all firms are willing or able to make this investment and are looking for alternatives, including acquisition by larger firms.

Public companies have historically been active acquirers, a trend that continues. They buy agencies using some combination of cash and stock. This is based on an established market for the shares so that the seller will be able to “cash out” at some point. Some public buyers allow the sellers to operate with a fair amount of autonomy as long as certain returns are generated, while other buyers achieve additional value through the consolidation of service and support. Clients of an acquired firm often find they have access to more products and services than they had prior to the sale, but conversely often find they are working with a new service team after the earn-out period is over, as quarterly results drive decisions over time at these firms.

Private equity firms are more recent players in the brokerage segment. They have been drawn to this segment due to its strong cash flow and the PE firm’s ability to generate a strong return on equity (ROE), and today remain significant players in the M&A arena. Some have taken large, public firms private, while others have created national firms starting with a large regional as a platform. Their approach is different than their public brethren, who hang on to and eventually integrate their acquisitions. For PE firms the objective is to buy, increase earnings and sell, often in a three-to-five-year timeframe. Selling agencies will receive cash and restricted stock in deals with these buyers, with the hope that they will realize a liquidation of their shares when the company is re-sold. As with acquisitions by public firms, this can lead to more resources for clients of the acquired firm. However, because the goal of the equity investor is to sell the firm in a relatively short period of time, clients may experience more disruption in service when the company is prepared for re-sale.

Large regional brokers are likely to remain the alternative for many smaller agencies and producers—traditionalists with limited human or capital resources, who are too small for the public and private equity firms or who are looking for a better cultural fit. The regional firms have added resources to support their clients’ expanded needs, and can help them evaluate funding alternatives, provide guidance to help navigate ACA, state, and local regulatory issues and can provide advice and support regarding employee communications, technology and wellness programs. As brokers adapt to this new landscape, we can expect more M&A activity (such as the Willis-Towers merger) in 2016 and beyond. Though strategically significant, transaction volumes may be less dramatic than those of the past decade but those brokerages with forward-looking investment strategies will possess both the depth and breadth within the industry to be active as a consolidator.

ABOUT STEVE VILAS: Steve Vilas has more than 25 years of experience with insurance brokerage/consulting firms, specifically in managing agency finances and operations, launching new initiatives, recruiting and expanding market share. As a vice president at Burnham Benefits, Vilas’ role is to expand Burnham’s footprint in other markets by overseeing new initiatives, private exchanges, captives and special programs. Vilas also works to help Burnham grow in key market areas including the public sector and the transportation and distribution industries. Burnham Benefits’ goal to expand its one-of-a-kind client experiences into new markets allows Vilas to continue his path as a proven leader, strategic advisor and a respected member of the Burnham team. Vilas works closely with Burnham Benefits’ Northern California regional president Michael Michalski, to meet the needs of Burnham clients by helping them navigate the Affordable Care Act and other changes in the industry. Together, their goals are to continuously develop new business and create new tools and resources to better serve existing clients along the way. Vilas most recently served as chief operating officer of Employee Benefits at Edgewood Partners Insurance Center, LLC, in San Francisco. He has also served as chief financial officer at both VRT Insurance Services, Inc. and at Sitzmann Morris & Lavis, both in Oakland. Vilas is a current California Accident and Health licensed agent. He earned a Bachelor of Science degree in business administration from the University of California-Berkeley.

ABOUT BURNHAM BENEFITS INSURANCE SERVICES: Burnham Benefits Insurance Services, Inc. is a privately held, full-service employee benefits consulting and brokerage firm headquartered in Irvine, Calif. The firm is among the largest in the state to specialize solely in strategic employee benefits consulting and brokerage services. With a comprehensive offering of client-first health and wellness programs, Burnham effectively manages more than $1.5 billion in premiums for more than 400 clients. A certified Benefits Corporation (B Corp), the firm maintains a more than 97 percent client retention rate and has averaged 25 percent growth annually over the past 10 years. Because Burnham Benefits does not have outside shareholders, it can easily adapt and create customized solutions that fit clients’ best interests — investing in cutting-edge technology and the tools and resources needed to provide the specialized level of service that today’s rapidly challenging climate demands. Its team of more than 80 highly skilled industry professionals includes in-house underwriters, compliance officers, healthcare reform consultants, communications specialists and wellness experts. Through a strategic partnership with Burnham Gibson Financial Group, Burnham also provides retirement planning and wealth management services. Burnham Benefits’ footprint currently spans offices in Orange County, San Francisco Bay Area, Los Angeles, San Luis Obispo, Santa Barbara, Sacramento and San Diego, Calif., as well as a satellite office in the Washington D.C. metro area. Burnham Benefits holds national recognition as Business Insurance’s #1 Best Places to Work in Insurance 2013 and 2014 and has been ranked a Best Place to Work by the Orange County Business Journal for five years running. For more information, visit www.BurnhamBenefits.com <http://www.BurnhamBenefits.com>.