The continuing soft property-casualty market doesn’t necessarily mean hard times for brokers. Many don’t even consider market conditions when formulating organic growth strategies.
For some firms, organic growth can be bolstered using strategic M&A.
The greatest opportunity to maximize organic growth might just be retaining your clients.
Technology plays a role in organic growth by allowing customers to transact business digitally.
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Instead, they approach growth from a variety of directions, ranging from hiring and training practices to strategic M&A.
“We’re estimating that organic growth in 2016 was 4.0% on average, 4.6% in ’15 and 7.7% in ’14,” says Phil Trem, senior vice president with MarshBerry. “The economy has been relatively stable in that time frame, but since 2014 the rate environment has been decreasing. Most high-performing organizations aren’t saying, ‘The rate environment is changing. Let’s do something about that.’ First and foremost, it’s about people—training and mentoring.
“Firms that grow organically can complement organic growth with M&A, but it can become problematic if they substitute M&A for organic growth,” Trem says. “Organic growth typically has a higher return on investment than an acquisition does.”
Some firms have shown, however, that organic growth can be bolstered using strategic M&A. Although these deals don’t initially appear as organic growth, they have the potential to foster it over time.
“It varies quite a bit” among brokerages, says Paul Newsome, managing director at Sandler O’Neill + Partners in Chicago. Companies like Arthur J. Gallagher, he says, are primarily trying to expand organic growth through better execution, while others are trying to expand organic growth by changing the types of business they are in. “Aon would be the most notable example of this, where they are divesting [themselves of] businesses that they think have lower organic growth capabilities,” he says.
For example, Aon signed a definitive agreement in February to sell its benefits administration and HR business processing platform to Blackstone for more than $4 billion.
“The sale…creates incremental capital to strengthen growth in core operations,” says president and CEO Greg Case, “and accelerates the pursuit of inorganic growth opportunities that address emerging client needs, similar to recent acquisitions in cyber risk advisory and health brokerage solutions.”
Firms that grow organically can complement organic growth with M&A, but it can become problematic if they substitute M&A for organic growth.Tweet
Quentin McMillan, a director at Keefe Bruyette & Woods in New York, says Aon is using the proceeds from this sale for share repurchases and M&A. “Also,” McMillan says, “the company is already spending $300 million to $400 million annually investing in their data and analytics, which is driving strong organic growth in new areas.”
Newsome says there’s a lot of strategic M&A going on among the publicly traded brokerages. Marsh and Aon, he says, both are growing middle-market efforts. Marsh’s Marsh & McLennan Agency operation most recently announced five acquisitions between December and March, including both employee benefits and traditional p-c firms. “We invest to grow…both organically and through acquisitions, said Dan Glaser, president and CEO of Marsh & McLennan Companies, during last year’s fourth-quarter earnings call. “We have been improving the mix of business over several years by focusing our investment in growth areas while divesting or deemphasizing other parts of the business.
“We invest to enhance the growth rate of the overall firm across three target areas—geography, segments and capabilities,” Glaser said, pointing to examples such as Marsh’s buildout of Marsh & McLennan Agency, the emergence of cyber, flood and mortgage practices, and investments in Oliver Wyman’s digital technology and analytics platform. “We expect these faster-growing businesses will become a larger proportion of MMC over time, enhancing our long-term revenue growth.”
McMillan also notes that brokerages are using strategic M&A to bolster their competency in emerging lines of business. Aon recently purchased Stroz Friedberg, a cyber risk management firm, for about $300 million.
“As CEO Greg Case discussed on the call, the p-c insurance industry has placed $2 billion in cyber premiums while clients have reported $400 billion in losses,” McMillan says. “The magnitude of this gap clearly shows the runway for growth, and our view is that Aon’s investment in cyber and certain other high-growth areas should benefit longer-term organic growth trends.”
Spreading the Expertise
Most of the brokers have centers of excellence for various specialties, McMillan says, and these can help drive specialty expertise farther through the organization. Gallagher, McMillan notes, has talked about this concept in the past. “The small broker they purchase is friends with the CFO of a big business in their town,” McMillan says. “The business is growing, and more specialty insurance needs to be purchased, above the scope of the regional broker. The broker can call AJG’s center of excellence, work with someone who specializes in that type of risk and write business the broker would never have been able to due to the specialty nature of the risk.”
The center of excellence approach to organic growth extends beyond the large national brokerages. “We have more than 25 centers of excellence that are risk focused, and we have dedicated leadership and teams that are charged with keeping abreast of the current trends, deep technical knowledge and understanding how to successfully articulate the value to clients,” says Jim Kapnick, CEO of Kapnick Insurance Group in Adrian, Michigan. “Because we have spread out the responsibility, we can gain greater expertise and dramatically improve speed to market on innovative risk solutions.”
We have institutionalized the ‘one firm’ mentality and bringing best-of-class solutions to business, human capital and individual risks. All new employees are encouraged to become cross-licensed, and we are training people to assess risk on a holistic basis and bring in the appropriate expertise as needed.Tweet
In addition, Kapnick says, “We have institutionalized the ‘one firm’ mentality and bringing best-of-class solutions to business, human capital and individual risks. All new employees are encouraged to become cross-licensed, and we are training people to assess risk on a holistic basis and bring in the appropriate expertise as needed. We have broken down the traditional silos and are truly bringing a better solution for the client.”
Moving away from traditional sales roles is an emerging theme in agency growth, and this can apply to hiring practices as well as training. In explaining what drives business development at Parker, Smith & Feek in Bellevue, Washington, president and CEO Greg Collins highlights recruiting—in particular, recruiting both experienced account executives and account executives who have no experience in insurance but have worked in client relationship/business development roles in other industries, such as banking.
“Every time you do this,” Collins says, “you expand your sphere of influence, especially when you put them in product groups where their centers of influence can be leveraged.”
Client Retention Strategies Can Feed New Business
Is there room for growth in client retention? It depends on how you look at it. “Client retention is high,” says Kai Pan, an equity research analyst at Morgan Stanley in New York, “so the key to enhance organic growth is increase business with existing clients and attain new customers.”
But Collins thinks that perhaps the greatest opportunity to maximize organic growth lies in the simple math of client retention. “Most good brokers, I hear, hover in the 90% to 92% annual retention area,” he says. But that means a broker with 90% retention and $20 million client revenues is losing $2 million of client business annually. “To grow 8% organically, they need to replace that $2 million and then add another $1.6 million, assuming all their renewals stay at the same level. That’s $3.6 million new business,” Collins says.
That translates into “sales velocity” of 18%, which is “very hard to do,” he says. “Our retention the past two years is 98%. At 98% you would need to add $2 million to grow at the same 8%— a sales velocity of 10%, much easier than 18% in sales velocity. In short, I believe brokers should first focus on outstanding client service and retention and then use those same skills to attract other, similar clients who want the same outstanding service. If you focus on client retention—every day working to increase your value to your current clients—you will develop skills, resources and expertise that you can use to differentiate yourself in business development.”
Another important strategy for Parker, Smith & Feek is to focus on the clients they can serve best. There are seven major practice areas that comprise 73% of the agency’s business: construction, real estate, healthcare, food processing, manufacturing, high tech and professional services. “All have characteristics of businesses we like working with,” Collins says. “They tend to be larger and well managed. They have sophisticated risk-management needs, pay a lot of money for insurance and have a high expectation for broker services. In short, they have difficult risk-management problems to solve.”
I believe brokers should first focus on outstanding client service and retention and then use those same skills to attract other, similar clients who want the same outstanding service.Tweet
Technology Drives Opportunity and Service
Technology also plays a key role in enhancing organic growth, but technology alone is no panacea. “They don’t have to have a huge system. It just depends on how you use it,” Trem says. “The tools are important, but if you’re not using it right, it’s not doing you that much good.”
For Insureon’s Insurance Noodle in Chicago, technology means zeroing in on data analytics, says President Ralph Blust. The use of data and industry analytics is an important and emerging area to facilitate organic growth,” Blust says. “Data identifying buying practices to then predict speed of growth of companies in specific verticals is an example of how data can help agents target companies within verticals. Our industry has relied too heavily on actuarial sciences historically, and now, with increasing optics to other relevant and factual data points, an agent can identify industry opportunities.”
In Chicago, for example, the availability and placement of bike-sharing stations provides data on commuting patterns of urban dwellers. “Evaluating that data with business startups and closures can help an agent identify target marketing spends,” Blust says. “This same data can help a firm that is expanding identify areas for new offices and where to recruit new talent.”
Blust’s company is also analyzing the percentage of sales that appetizers and desserts make up of a restaurant’s revenues. They can then establish a probability for the restaurant staying in business, regardless of how long it has been established. “From this modeling, we are working with carriers to establish a pricing scheme directly related to the probable success of the restaurant,” he says.
Technology can also play a role in enhancing organic growth, allowing customers to transact business through digital means. Greater use of digital technology does not mean a broker must downplay its role as an advisory firm, Kapnick explains.
“There is a belief in our industry that to survive you either need to be an advisory firm or have an exceptional client digital experience,” he says. “I disagree and believe that those who survive will be both. We already are a best-in-class advisory firm and are focused on delivering a best-in-class digital experience. This includes providing tools and resources to our clients to help cut the administrative burden and create greater transparency in working together.”
No matter what strategy a brokerage follows, Collins says, it must recognize the customer should always come first. “We should always be fighting for the best treatment possible for our clients—that means the lowest reasonable premiums we can achieve. Most of our larger clients are on a fee structure with us. That means we get paid for services and outcomes—not based on how much the client pays in premium. To be overly concerned about client premiums because it affects your revenue is a conflict of interest. In fact, we should be working every day to take cost out of our clients’ risk exposure. So I am not concerned at all about the soft market. I assume the carriers know what they’re doing in pricing, and I’m delighted to see rates go down. It’s very helpful to our clients.”
Hofmann is a freelance writer. firstname.lastname@example.org