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Merger and acquisition activity in the insurance sphere on the global stage cooled off in 2016 compared to the previous year, but the picture is different in the insurance distribution arena, where activity remained strong last year going into this year. These are the findings of two new reports from Conning Inc., a global investment management firm.
The global stage details M&A activity among large companies, among them Boston-based Liberty Mutual, which completed its acquisition of specialty insurer Ironshore Inc. earlier this month for $3 billion. It was one of only four transactions greater than $1 billion that Conning reports in its latest industry report, “Global Insurer Mergers & Acquisitions: Activity Slows but Pressures Remain.”
Liberty Mutual said in a statement it is combining its existing Liberty International Underwriters U.S. business and Ironshore’s U.S. specialty lines business under the Ironshore brand, which it said will create the sixth largest writer of excess and surplus lines in the U.S. based on 2016 direct written premium. That’s one sign of the increasing interest in specialty insurance on the global theater, said Alan Dobbins, Conning’s director of insurance research.
The M&A activity is a result of forces that include sluggish interest rates and capital buildup, Dobbins said. In the global arena, acquisition is the only way to grow, due to excess capital and flat interest rates stanching organic growth. In this market, there’s a plentitude of buyers, including agents, brokers, managing general agents and managing general underwriters, and private equity firms.
A separate Conning study, “Global Insurance Distribution & Services Sector Mergers & Acquisitions: The Beat Goes On …” focuses on the insurance distribution and insurance services sectors, and that’s where regional bank activity falls into the picture. Insurance distribution channels include brokers and agencies, both independent and captive. And according to Dobbins, while brokers and other large independent agencies are the most avid shoppers, banks have also become more active in this sphere.
Taking It To The Bank
On the local scene, Eastern Bank’s insurance division has made several acquisitions between late 2015 and the present, and its Eastern Insurance Group LLC, founded in 2002, is one of Massachusetts’ largest insurance agencies, and the 48th largest U.S. agency. The division is “material to the bank’s financials and profits and in the top five bank-owned agencies in relation to their contributions to the parent,” Ronald Cleaves, CPCU, CSP, ARM, and chief administrative officer of Eastern Insurance Group LLC, said in a statement.
Cleaves said Eastern’s acquisitions must be a good cultural and reputational fit, in the insurance industry, their community and with their carriers. In such agencies, he said, “the seller’s staff appreciates our offering and we have not had an acquisition that has not proven to be successful to date.” Its acquisitions, he said, represent “either an expansion in an existing niche business we are already successful with or we are acquiring a competitor or expansion into a geographic area where we want to further increase our client base.”
In the insurance distribution arena, a lack of succession plans on the part of small agencies plays a prime role.
“Time was, founders would hand their businesses over to their sons. That’s less likely now,” Dobbins said. Then there’s the escalating cost of technology that addresses data analytics, claims and customer interface. It encounters the headwinds of potential clients’ legacy systems, resulting in price pressure.
“Another big push in distribution is that it is becoming more and more expensive to service customers,” Dobbins said. “Agencies must develop some scale” to do that economically.
Yes, scale matters. Cleaves said that lack of a succession plan is more of a concern for smaller agencies than mid-sized to larger ones. The latter “have generally planned their perpetuation or sale in advance knowing that most acquirers want the principals to continue on in their roles [through] a minimum three-year transition and smooth integration,” he said.
Salem Five Bank acquired the Otis Brown Insurance Agency in Lexington last year, but is looking to expand the footprint of Salem Five Insurance Services LLC, now 100 percent in property and casualty business and divided equally between personal and commercial, into other fields, including benefits and health care.
“The business is getting more difficult,” said Brian Boyle, senior vice president of Salem Five Insurance. “Many insurers didn’t want to invest in new technology and carriers don’t want to do business with those that don’t [invest].”
He adds that 40 percent of Salem Five’s insurance business comes from its mortgage arm, Salem Five Mortgage Co., which has 30 mortgage brokers, and which the bank describes as the leading Massachusetts-bank-based mortgage financer. Salem Five seeks to increase its insurance penetration throughout Essex, Middlesex and Norfolk counties, where the mortgage business already has a presence. “Our brand is well known,” he said.
