The insurance broking sector is catching the eye of private equity investors thanks to its high quality earnings, the key role that brokers play in the insurance market and the increasing consolidation in the industry. However, non-financial factors are equally important in creating a successful buy-and-build strategy, writes Tom Elliott, investment director at Bowmark Capital.

When it comes to evaluating potential acquisitions in any sector, we carefully analyse the financial risks and merits of every deal.  But we also dedicate significant time and resources to assessing industry trends, management, branding, information technology and people as part of our due diligence process.  All are important factors in ensuring a successful outcome.

As an example of a typical buy-and-build investment, we backed Peter Blanc in the management buy-in of Aston Scott in 2015.  Since then, we have supported a number of bolt-on acquisitions, as well as completing the transformational merger of Aston Scott with Lark in September 2017.  The combined group, Aston Lark, is now one of the UK’s top 20 independent commercial insurance brokers and employee benefits practices.  It has around 600 staff placing more than £250 million worth of gross written premium from 18 offices across the UK.  We see further growth to come, both organically and through more acquisitions of brokers.

There were five themes underlying this investment, which are also highly relevant in other sectors.

"The quality of insurance broking earnings is underpinned by retention rates as high as 90 to 95 per cent." 

Industry trends

The quality of insurance broking earnings is underpinned by retention rates as high as 90 to 95 per cent.  In addition, commercial lines insurers are becoming ever more reliant on the broker channel, due to the complexities of insuring and servicing the diverse SME market.  The sector is also ripe for consolidation.  Creeping changes in regulation and compliance continue to drive up costs, which hit the 3,000 or so smaller brokers operating across the UK especially hard.  At the same time, with the average age of insurance broker owners steadily increasing, many are exploring retirement options. 

Management

The impact that owner-managers have on their businesses should never be underestimated, and we work hard to understand the role that each member of the incumbent team wishes to play going forward.  Ideally, we favour acquisitions that retain the experience of owners post-acquisition.  For example, Aston Lark recently acquired Bell & Co, a high-quality chartered insurance broker based in Derby, where Bell’s managing director, Richard Salt, had ambitious expansion plans in the region.  Following the acquisition, Salt has taken on a broader role within the larger business.

Conversely, we have also completed deals that enable founders to retire.  In these situations, we spend time getting to know the successors within the management team, ensuring there is sufficient leadership to oversee day-to-day operations.

 

Branding

While we don’t believe in a one-size-fits-all approach to branding, we do feel there is a benefit to harmonising brands where possible.  In particular, it allows you to maximise the return on centralised marketing spend and name recognition.  We also realise that certain brands resonate with clients, and so we agree timelines for rebrands up-front, and pay careful attention to communications with staff and customers.

However, retaining brand names may also make sense in certain situations, particularly with product specialisations.  For example, Aston Lark will house a small number of leading brands in their own right, including Lark Music, which has developed a leading specialist scheme in the musical instruments sector.

"When we look at the various transactions completed in the insurance brokerage sector, the most common cause of failure has been IT mismanagement."

Information technology

When we look at the various transactions completed in the insurance brokerage sector, the most common cause of failure has been IT mismanagement.  When you don’t move towards a single IT platform, with all of the information on one system, management can start to lose control.

Whenever we review a new opportunity, we spend considerable time developing an IT “roadmap” to make the transition as efficient and painless as possible, and we typically move smaller acquisitions to the single IT platform within three months of completion.

Following our investment in Aston Scott, the business transitioned to new software and a new infrastructure provider (Node4) with the aim of creating a platform that could support future growth.  We will migrate any future acquisitions onto the same system, so that everything is harmonised and can be systematically monitored and managed. 

People

Finally, there is no doubt that retaining talented people is the key success factor for any acquisition.  To facilitate this, it is vital to align both culture and financial incentives.  With Aston Scott and Lark, we identified a great fit and common ethos amongst the employees of both companies.  We were proud of Aston Scott’s status as a Chartered Insurance Broker, an award for excellence which is only given to a small number of organisations.  When we came to assess Lark, it was a positive factor that they too had achieved the same status, as the award recognises the dedication of the team to delivering high-quality customer service.

Overall, it takes more than money to create a successful buy-and-build strategy.   While the bottom line is crucial, investors also need to pay careful attention to the personalities, technology and marketing issues inherent in any acquisition.

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