Broker Consolidation: Is Bigger Better?

"If I get 200,000 submissions and do business with 800-plus markets, I touch 12,000 retailers. That gives me knowledge so when a retailer asks about an unusual issue, like E&O on a cemetery, I'm already handling 300 cemetery accounts and know where to go" to place it.

It also lets you invest in what you need. "My job is to use aggregation to provide tools, training and stability," Mr. DeCarlo said. "We work on behalf of retail brokers to give them the best information to do their jobs," including cat modeling, actuarial services and good data.

But size alone is not the deciding factor. "I don't want to confuse being bigger with being better. You can be so big you are not effective or responsive," said Neal Abernathy, CEO of Swett & Crawford. You also can be a small, nimble broker hampered by too few resources. "I do think the larger firms with the resources and the ability to invest (in their infrastructure) are better positioned long term," he said.

While a broker with just a couple of offices wouldn't benefit that much from a heavy technology investment, a broker like Swett & Crawford, with 25 offices around the U.S., can use technology to move work around the country to the most efficient people. It also has allowed his company to hire people and support them remotely, providing access to a greater pool of potential employees, Mr. Abernathy said.

In addition, larger retailers are less likely to do business with a "mom-and-pop shop" because of E&O liability issues and financial concerns, said Mr. Abernathy.

The two men shared their strategies in advance of the annual conference of the National Association of Professional Surplus Lines Offices, Ltd. The Kansas City, Mo.-based association of wholesale brokers and surplus lines offices held its annual meeting in Atlanta early last month.

John Kraska, managing partner at merger-acquisition adviser Hales & Company, added that scale allows a broker to run more business through a particular insurance company and gain greater leverage in negotiations. This in turn "poses a threat to small, undercapitalized wholesalers," he said.

For John Howard, CEO of Crump, size and diversification mean security and stability. "Property-casualty is less than 20 percent of Crump's earnings, so even though we are in a soft market, we can continue to invest in strengthening our platform."

There's a flip side to mergers and acquisitions activity, though. "These consolidations are causing some concern among their employees, markets, retail brokers and insureds. There's so much change right now that some of the trading relationships aren't sure who they can rely on–which is good for those not going through change," said Mr. Howard.

Prior to October, Crump's latest acquisition had been the BISYS commercial insurance services' life insurance and retirement services divisions in 2007. Early last month Crump Group announced its subsidiary, Crump Property & Casualty Insurance Services, had acquired Target Underwriting Management Corporation–a managing general underwriter and program administrator, expanding the wholesaler's professional lines capabilities.

So who is the largest?

"Crump is the largest wholesale broker in the world and in the United States," said Mr. DeCarlo of AmWINS. "If you add up just the wholesale premium, AmWINS should be the largest, but that's not an accurate measure of companies." Industry listings for Marsh, Aon and BB&T include all their operations, "so why can't Crump's listing include life and property and casualty as well?"

The combined AmWINS-Colemont distributes about $4.8 billion in property and casualty and employee benefits, while Swett & Crawford-Cooper Gay together will place about $3.5 billion in insurance and reinsurance business.

TIMING

The large wholesaler landscape had been relatively quiet over the past few years as brokers began branching out in different directions. Texas-based Colemont had gone outside the United States to expand its product and geographical reach, said outgoing NAPSLO President Marshall Kath, director of industry relations for Black/White Associates of Kentucky and former CEO of Colemont Insurance Brokers.

North Carolina-based AmWINS branched out into medical stop-loss, third-party administration for health insurance plans and larger managing general underwriter (MGU) operations.

Colemont had taken on a lot of debt to grow as it did, but unlike AmWINS did not have significant private equity funding. (Parthenon Capital LLC acquired a majority stake in AmWINS in 2005.) So the April marriage to AmWINS seems to provide Colemont with security and possible synergy. AmWINS, whose key people were already well acquainted with their peers at Colemont, saw this as "a chance to become a wholesaler broker on the world stage," said Mr. DeCarlo. In fact, in September the company acquired a majority share of CMK Insurance Brokers in Seoul.

British wholesale insurance and reinsurance broker Cooper Gay is very strong in Latin America, Europe and the Far East, but has very limited U.S. operations, making it a good fit with U.S.-focused Swett & Crawford, which spent years looking at a number of London brokers to add international capabilities without creating channel conflict, said Mr. Abernathy.

Finally, in March 2009, an investment banker introduced him to Cooper Gay's Toby Esser and the search was over. Negotiations took an unusually long time because of the deal's complicated and private financial structure, but it closed in July 2010.

While each case is different, financial-services experts point to the recession and high debt loads as factors that have likely encouraged mergers across a broad spectrum of the sector this year and will likely continue to do so.

"The soft market is driving deals. Margins are eroding," said Kevin Donaghue, managing director, Mystic Capital Advisors Group LLC. Long term, some companies are merging now to push efficiency and get a cash-flow bump when the market eventually hardens.

Now is the traditional time for investors to begin to cash out, explained Mr. Kath. "Private equity firms are not a long-term ownership proposition-everyone knows that going in." These firms come in to grow a business, then look for an exit strategy five to seven years after purchase. We are now reaching that threshold, he said.

It was relatively easy for private equity firms to get into insurance, but cashing out isn't so easy right now. (See related textbox below, "Capital Floods In.")

"In an economy this rugged and where capital markets are not functioning as they historically have done, private investment firms can't simply sell brokers to another entity. Nor can they go easily to an IPO or be properly valued and sold to a strategic third party," said Mr. Kath. Instead, they can try to strengthen their investments and prepare it for sale or IPO at the proper time. In some cases, that means growth through consolidation.

While some companies are just hanging on in this soft market, Crump's Mr. Howard said his company's wide geographic and product diversification has left it secure and "actively pursuing acquisitions."

Susan R.A. Honeyman is a freelance journalist. She is located in New York City.

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Capital Floods In

In 2005, a lot of capital was looking for a good home. In the post-9/11 years, the cycle had hardened and the insurance industry looked very attractive, especially after property rates rose in Hurricane Katrina's wake. Meanwhile, the fallout from New York State Attorney General Eliot Spitzer's investigations of insurance brokers led the large retailers to put their wholesale brokerages up for sale to quiet critics.

The year saw several deals:

J.C. Flowers purchased Crump from Marsh & McLennan

A combination of Hicks, Muse, Tate & Furst, Bank of America Capital Investors and Emerald Capital Group purchased Swett & Crawford from Aon.

AmWINS acquired Willis Group's U.S. wholesale unit, Steward Smith, and became majority-owned by Parthenon Capital LLC.