Insurance Brokers Seen As A Good Investment

ATLANTA–The investment community believes insurance brokers are a good investment in the future, which is why USI Holdings secured backing for its transition to a private company, the firm's chief executive said.

Speaking before a group of agency and brokerage firm executives, David L. Eslick, chairman, chief executive officer and president of the Briarcliff Manor, N.Y.-based insurance brokerage firm, said the investment of private equity money in the insurance arena is “one of the most positive endorsements of our business in a long time.”

Mr. Eslick was part of a panel discussion on mergers and acquisitions that was part of Atlanta-based Reagan Consulting's two-day seminar here dealing with issues concerning mergers, acquisitions and internal perpetuation.

Since USI completed its deal with Goldman Sacks on Friday for approximately $1.4 billion, Mr. Eslick remarked that the broker is “really excited now that we don't have to answer questions about what our next quarter is going to be like.”

H. Wade Reece, president and chairman of BB&T Insurance Services Inc., a subsidiary of Winston Salem-based bank BB&T Corp., said that for public brokers, though they have to acknowledge the short-term growth concerns of the investment community, focusing on long-term growth is more beneficial to a brokerage firm's overall performance.

“You have to take the longer-term look at the business,” he said.

J. Hyatt Brown, chairman and CEO of Daytona Beach, Fla.-based insurance brokerage firm Brown & Brown Inc., said the infusion of private equity money is only part of the long-term evolution of the insurance industry.

He observed that in the late 1950s it was predicted that direct writers would take over independent agents' business, indicating the future is difficult to predict.

He noted that private equity has a “river of money” that needs to be invested now, which is part of the reason why USI and Hub International, a Chicago-based insurance brokerage firm, have been able to make arrangements with private equity firms to take their firms private.

He said the deals were good for both firms, but cautioned that for the private equity investors, the return may not be as big as they expect. Mr. Brown pointed to the Kohlberg Kravis Roberts & Co. L.P. takeover of Willis Group Holdings as a perfect example of the kind of deal many private equity firms hope for. KKR took Willis private in 1998 and took it public again in 2001.

“If they do half as well as [Willis] then they will do great, and I think they probably will,” said Mr. Brown.

While the private equity money may be contributing to the increase in prices for agencies, John Lumelleau, president and CEO of Kansas City, Mo.-based Lockton Companies, said there is a limit to how much money anyone can pay.

Unlike the others, who have been active acquirers to ensure growth, Lockton has relied more heavily on organic growth to build its business, he noted.

Both Mr. Lumelleau and Mr. Reece said their acquisition strategies have centered on strategic acquisitions.

On what they may be looking for culturally, Mr. Brown said there has to be a fit between cultures and personalities. “If it's someone you're not going to like to have over for dinner, you're probably not going to like working with them,” he noted.

Moderator Bobby Reagan, president of Atlanta-based Reagan Consulting, asked panelists if their firms were impacted from revelations some insurers paid brokers contingents to reward bid-rigging and steering activity.

All four panelists said they have tightened their client disclosure notifications, but it has had no effect on the contingent fees they receive based on profitability.

However, Mr. Brown said insurers will have to fix the current reward system because companies are finding themselves paying out more than they have in the past due to accounting changes they have made.

As for the future of the industry, all said they expect to see continued consolidation but also expect growing opportunities in the future.