Consolidation of commercial insurance brokers
With high profile stories of some broker consolidators being highly geared and exhibiting slowing growth, why are we at ISIS still keen on the consolidation play within the commercial insurance broking market?
Well, it’s clear to us that the strong players within the commercial and HNW insurance broking market are robust businesses. Good management teams deliver staff and customer loyalty, high retention rates of 90% plus and have positive cashflows. Their service is highly valued and a necessary part of business. Not a bad place to start as the basis for a private equity investment.
And it is as clear as ever that the drivers of consolidation will remain. The main driver of previous consolidation was the simple application of buying power – uplifting commissions from a smaller acquired player. This has been highly effective in the past and will remain to a lesser extent, but probably unlikely to be the most sophisticated or long term dependable aspect of a growing integrated acquisition story. Other drivers of consolidation being increasing compliance and simply the age of private owners certainly remain valid.
But there are some material challenges too. The first challenge is non-acquisitive growth…good old fashioned organic growth. Any acquisitive business should have an organic growth strategy as well in my view – it’s an alternative to acquiring the next target and should help to control overpaying. Acquisitions should only help you build the vision of an integrated business faster – its not a strategy in its own right. But of course if you can achieve 92% retention then so can others and customers are not easy to prise away from decent competitors.
Successful players increasingly need to invest in the best Sales and Marketing skills. We have seen some good examples of specialist product and services being deployed in market niches to gain growth momentum against non-specialists.
And a second challenge is IT. We at ISIS have significant experience of backing B2B service businesses gaining real competitive advantage from the best IT solutions – both for the customer and for their own teams to deliver exceptional service. IT innovation to help deliver exceptional service is a key part of the competitive playing field.
It will be interesting to see how consolidation will play out: slowly in our view, but unrelenting. And we certainly believe the winners will build coherent, integrated businesses – which takes time and long term vision. And some nerve not to overpay!
Contact: Andrew Garside / February 2012
The ideas and conclusions in this column are the author's own and do not necessarily reflect the views of ISIS Equity Partners. They are for general interest only and should not be taken as investment advice or as an invitation to purchase or sell any investment.
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