Alex Wright

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at riskletters@lrp.com.

M&A Activity

No Sale

Independent brokers value the freedom to define their culture and corporate philosophy.
By: | April 8, 2015 • 7 min read
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Small and medium-sized independent brokers face an ever-increasing battle to maintain their independence, according to industry experts.

A growing number of independent brokers are being swallowed up by big publicly traded firms and private equity (PE), with nearly 60 deals completed in the first two months of this year alone.

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The recent upsurge is being fueled by hungry capital-rich investors keen to tap into a lucrative market and by the need for larger brokers to increase scale through mergers and acquisitions.

According to one market insider, it has reached the point where today it is tougher than ever for firms to stay independent.

Phil Trem, senior vice president at consultancy firm MarshBerry, said that is because many companies don’t have a natural successor in place to continue the business.

“Roughly 75 percent of agencies that want to perpetuate will be unable to because they haven’t properly reinvested in the next generation to create a market for their stock.” — Phil Trem, senior vice president, MarshBerry

“Most firms want to retain their independence but the practicality of that is limited,” he said.

“Roughly 75 percent of agencies that want to perpetuate will be unable to because they haven’t properly reinvested in the next generation to create a market for their stock.”

He added that most independent brokers or agency owners are worried that if they sell or merge their company, they will lose control of its ability to grow.

“It may seem trivial but most of the owners have not had a boss in many years — the thought of working for someone is hard to contemplate,” he said.

For those that do decide to take the plunge, he said, the two biggest influencing factors to consider are the effect on the company’s corporate culture and access to resources once the deal is completed.

“After all, sellers only want to make sure they can gain a competitive advantage in the marketplace to help themselves and their staff be more successful,” he said.
However, in the face of increasing consolidation, some independent brokers have stood firm and managed to maintain their independence — and many of them believe they are better for it.

With an estimated 429,101 insurance brokers and agencies in the United States, according to the latest research by IBISWorld, it’s no surprise that some firms are natural takeover targets.

Last year, 321 deals were announced, up 43 percent from the previous year, and only four off the record high of 325 in 2012, according to MarshBerry.

That trend is only set to continue through 2015, driven by new demand and the formation of the National Association of Registered Agents and Brokers (NARAB), enabling agencies to compete on a national basis.

Added to that, increasing financial and regulatory burdens are forcing many businesses to sell up or merge just to survive.

Direct Accountability

While the prospect of partnering with a larger firm can seem attractive at first, offering access to wider markets and the ability to go after bigger and more complex accounts, it can also result in layoffs and office closures, as well as having to tear up entire technology platforms.

So it’s easy to see why some brokers are reluctant to become part of a bigger company and why they are so keen to maintain their independence.

David Lockton, chairman, Lockton Cos.

David Lockton, chairman, Lockton Cos.

David Lockton, chairman of Lockton Cos., the world’s largest privately held independent insurance broker, said that the key advantage to being independent is the ability to report in to one person and not to be held to account by a group of shareholders, or PE or hedge fund.

“At the end of the day, I want my team of lawyers, accountants and business and risk management consultants reporting in to me, not a group of public shareholders,” he said.

“Being independent means that they can do that and that they aren’t encumbered by other stipulations such as profit centers and quarterly margin requirements.”

John Lumelleau, president and CEO of Lockton, said that being independent also enables brokers to focus solely on their clients’ needs rather than worrying about other distractions.

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“Many organizations that were maybe once independent and have become part of a larger company or bought by private equity have had their whole structure and dynamic changed as a result,” Lumelleau said.

“Remaining independent, however, enables you to maintain your connectivity with your clients, which disappears to some extent when you are working for or are owned by somebody else.”

Lockton has been regularly voted in the trade press as the best insurance brokerage to work for, and David Lockton believes that is due to the firm’s culture of empowerment, which wouldn’t be possible if it was part of another company.

“We’re not about financial engineering,” said Lockton. “Our scorecard is not about top line revenue or margins. It’s about winning and keeping customers, which is something that has served us very well from a financial standpoint too.”

Lockton added that the company’s strategy is focused on organic growth through the acquisition of new clients and it would only take over another firm if it shared the same values and type of culture, sticking true to its independent philosophy.

David Walker, president of Hartland Insurance Agency and chairman of the Insurance Agents & Brokers of America (IIABA), said that the main benefit of being independent is the flexibility and capability it allows.

“It provides you with the flexibility to represent multiple carriers in multiple markets and the ability to access all of them on behalf of your customer and to determine where that business gets placed,” he said.

Walker, however, believes that it’s a different story for those independent brokers and agencies with revenues of between $1 million and $2 million who face the critical decision of whether to sell up or grow their business, due largely to economies of scale.

“There’s going to be pressure put on them by insurance carriers and by the marketplace, forcing them to decide whether to expand their business or sell up,” he said.

Preserving Culture

John Hahn, co-founder and CEO of California-based EPIC Insurance Brokers & Consultants, said that independence has enabled his company to build a platform and culture that allows its employees to prosper.

“I firmly believe that individuality is the trait that allows a professional to excel, and corporate culture is what guides behavior and binds the two together,” he said.
Hahn added that being independent also ensures that clients’ interests and company practices remain uncompromised.

“I firmly believe that individuality is the trait that allows a professional to excel, and corporate culture is what guides behavior and binds the two together.” — John Hahn, co-founder and CEO, EPIC Insurance Brokers & Consultants

Barnaby Rugge-Price, director, RK Harrison property and casualty — whose company, in March of this year, announced a merger with Hyperion Insurance Group to form the world’s largest employee-owned, independent insurance and reinsurance broker — said that independent brokers have the added advantage of attracting the best talent in the market.

As a result of that talent taking ownership of the business, he said, clients naturally expect a higher level of service from their broker.

“For us, independence means two things,” he said. “Financial independence leaves us free of outside control and allows us to make long-term decisions that are right for our business and for our clients.

“It also means that we are independent of any broking presence in the U.S. This allows our partners to have confidence that our interests are aligned with theirs — the best deal for their clients.”

Added Rugge-Price, “The Hyperion/RKH merger demonstrates that independents can continue to thrive but the bar is being raised all the time and in the face of a prolonged soft market, an ever-increasing burden of regulation and a consolidating client base, the next few years will be a test for everyone involved.”

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David Howden, CEO of UK-based Hyperion Insurance Group, added that central to the new company’s success would be its ability to maintain its corporate culture.

“If there’s one thing I fight hardest to retain as our business develops, it’s the entrepreneurial dynamic and enterprising culture of our business,” he said. “Therefore, we are focused on the needs of our clients, not on internal politics.”

While M&A may be on the increase, with more firms changing hands, for many of those in the independent brokering market, the benefits of staying independent far outweigh becoming part of a larger company.

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at riskletters@lrp.com.
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Reputation Risks

Risks of Celebrity Sponsors

Companies should review ‘what if’ scenarios before attaching products or services to a celebrity sponsor.
By: | April 8, 2015 • 2 min read
Tiger Woods Announces Indefinite Break From Golf

While the use of celebrities or sports figures may generate publicity around a product or service for a company, not all of it is good publicity.

You only have to open up a copy of the newspaper to read about scandals engulfing stars such as Bill Cosby, Brian Williams or Tom Brady with the New England Patriots’ and the “Deflate-gate” saga.

Sponsors have reacted by withdrawing their support, most notably in the NFL, where domestic violence allegations hanging over the sport prompted Procter and Gamble to pull the plug on a deal to supply players with pink mouthguards during Breast Cancer Awareness Month and cancel all on-field marketing.

The risks for any sponsor associated with this type of negative publicity are infinite, said experts, often resulting in the cancellation of lucrative advertising and marketing contracts, ultimately costing the company millions of dollars in lost revenue.

Worse still, the sponsor may be forced to pull its product from the market altogether, with the end result that millions of dollars are wiped off its share value.

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Lori Shaw, executive director of Aon Risk Solutions’ entertainment practice, said the main risk of hiring a celebrity to endorse a product is the unexpected or disgraceful behavior of that individual, or unforeseen events such as death.

“The first step is to analyze the potential risks; discuss ‘what if’ scenarios; outline the financial consequences; and to be aware of the risks that can be avoided, those that can be transferred contractually to the celebrity or talent, those that can be transferred to insurance and the risks that must be retained,” she said.

Shaw said that companies need to take a holistic approach to their branding and marketing activities in order to assess the potential impact of any adverse publicity on their balance sheet.

Nir Kossovsky, CEO of Steel City Re, a corporate reputation measurement and risk management specialist, said there are two instances when a company should walk away from a sponsorship.

“The first is if the costs of a parallel communication strategy coupled with the direct costs of sponsorship outweigh the value of the expected gain.

“The second is if, on objective reflection, there is a compelling case that the average stakeholder will hold management culpable for an adverse event no matter what the management says to the contrary.”

To mitigate against these risks, corporations are increasingly turning to specialized insurance plans and writing clauses into their contracts allowing them to cancel a deal if the celebrity is considered to have acted in an inappropriate manner that may damage the company’s brand.

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at riskletters@lrp.com.
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Emerging Risk: Drones

Risky Flights

Drone risks include collisions with aircraft, invasion of privacy, aerial surveillance and data collection.
By: | March 2, 2015 • 2 min read
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The increasing use of drones for commercial purposes has become one of the biggest emerging threats to the future of airplane safety, according to Allianz Global Corporate & Specialty (AGCS).

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The use of unmanned aerial vehicles (UAVs) for a host of different applications may leave operators exposed to a whole new set of risks, including third-party damage or injury and liability, according to AGCS’s Global Aviation Safety Study.
One of the biggest risks, it said, was from radio frequency interference, resulting in loss of control, and, in the worst cases, fatalities.

Other problems include invasion of privacy, aerial surveillance and data collection.

“With the ability to collect massive amounts of unsolicited data, UAVs present an enormous threat to individual privacy and a significant challenge for insurance carriers,” said Vikki Stone, senior vice president at Poms & Associates Insurance Brokers. “In drafting policies, it is crucial for carriers to know how such information will be used.”

The production of UAVs has increased by double-digits year-on-year since 2007, according to AGCS, with applications ranging from news gathering and surveillance to sporting events and crop dusting.

Such has been the take-up that the Federal Aviation Administration (FAA) estimates that by 2020, there will be about 30,000 small commercial unmanned aircraft in our skies.

However, coverage is limited, with only about 21 insurers involved and those that do offer policies have been hampered by a lack of historical and analytical data, the study said.

“Annual utilization, number of accidents and repair costs are not readily available and unmanned aircraft are not presently flying at the rate that they will be in the near future in the national airspace,” the report said.

Another problem is that, despite FAA plans to integrate UAVs into the U.S. airspace in 2015, there is a “lack of international, regional and local regulations for the safe operation of UAVs,” said Henning Haagen, AGCS’s global head of aviation EMEA and Asia Pacific.

Stone said that the No. 1 concern among carriers was the lack of certification of UAV pilots.

“I think the bigger problems are going to be the people that don’t follow the guidelines required, so ultimately we’ll end up with a number of rogue flyers out there — that’s the scary part,” she said.

Peter Schmitz, CEO of global aviation specialty at Aon, outlined other major risks of drones.

“The biggest threat is clearly the taking down of a major aircraft in a mid-air collision,” he said.

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“The second issue is the application of these vehicles in urban areas where the risk of damage to properties and individuals is much greater than it would be in rural parts.”

Schmitz said that regulatory authorities across the world face an uphill task in coming to grips with these issues because UAVs are still a relatively new and unknown quantity in terms of repair costs and loss ratios.

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at riskletters@lrp.com.
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