Brokerage Ops the M&A 2019 issue

The Case for Independence

Interviews with three independent agency leaders
Sponsored by MarshBerry

David Schaefer, President and CEO, AHT Insurance

Q
Why has your organization decided to remain independent? What are the most important factors in this decision?
A

Insurance brokerage is ultimately and fundamentally based on trust and a number of important promises. AHT firmly believes our independence is foundational to the promises we make to every client as it relates to service and our commitments to the partnerships we form with our clients. Losing our independence means a change in control of the business and an unambiguous surrender of the commitments we have made to our clients and our employees.

Built to last, AHT is structured optimally to provide every one of our high-performing professionals the opportunity to participate in the success of the organization. This fact contributes to our unusually high retention and long tenure of our professional staff as well as an unmistakable sense of teamwork and camaraderie. This consistency and professional latitude to always do what is right with absolute integrity is another important differentiator as our deliverable to AHT clients.

As a growing number of our competitors have lost their independence—along with the singular focus on serving the client—and are now also serving stakeholders seeking to take returns and value out of their organizations sooner or later, AHT believes there is a growing opportunity to serve a growing constituency of insureds and great insurance professionals who understand and appreciate the differences between these models.

Q
How do you prioritize investment dollars, which are limited? What services or technology capabilities differentiate your agency from competition?
A
As a matter of highest priority, AHT’s continued investment in and development of key proprietary tools and deliverables—technology-based and otherwise—provide our clients with effective, efficient services that advance our clients’ related positions and goals established through their relationships with AHT. As with most professional services firms, our staff is our most valuable resource, and the firm devotes considerable resources on an ongoing basis in training and development. Our ownership structure and perpetuation plan, areas of deep specialization, and expertise are primary differentiators for the firm, along with our staff and relationships.
Q
Are acquisitions a significant part of your company’s growth plans? How do you identify potential targets and compete against the most active acquirers?
A

In a manner of speaking, yes, but not in the classic sense. The competition of well funded, acquisitive organizations for insurance brokerages is intense, as everyone familiar with the industry knows. Through some first-hand experience and from what we have learned from others, regardless of the high-minded approach many sellers begin with as they dip their toes in the M&A market, in the end most sell to the highest bidder or near that, with little regard for the implications for their clients and their employees. The failure of serious, ongoing, sustainable perpetuation planning is nearly always the No. 1 driver to sell an insurance agency, despite the red herring of “more resources for our clients” that many sellers indicate is the primary driver to sell after the fact.

This is in spite of the fact that many of these organizations have survived, even thrived, on the promise of continuing independence and an opportunity for many of their next-generation best and brightest to own a part of the company and have a “seat at the table” at some point as a part of a perpetuation strategy. No wonder the industry has problems attracting and retaining youthful talent! AHT sees this dynamic as a wonderful opportunity to attract those professionals, cast out into acquiring organizations they never planned to join, with now-dead dreams of owning a part of the now-gone company they helped to build. These stranded entrepreneurs in search of a better business model—both individuals and teams from production, service and support—are AHT’s acquisition targets.

By building and continuing to grow a privately held, world-class brokerage operation that has a proven, sustainable perpetuation strategy, AHT has designed the perfect destination for like-minded insurance professionals who understand that this model we embody is an ideal for really serving insurance clients best. Leveraging a variety of connective technologies, AHT is agnostic to geography when it comes to employing these stars; we are about delivering a superior brokerage experience and service model to insureds who understand working with an owner is always better.

Q
What do you see as the future of the middle-market brokerage, given the consolidation that has occurred in the brokerage space over the last number of years?
A
The future will be bright for those middle-market brokerages who remain committed to—and plan to perpetuate for—the long term and who understand the value that can be delivered through the independent insurance brokerage model. This model presents lasting, substantial and incontrovertible advantages a good segment of the industry’s best talent and many prospective clients understand, especially after experiencing the available alternatives. By focusing primarily on serving clients and not shareholders or debt holders, the sustainable independent agency, owned solely by its high-performing professionals, should thrive for the foreseeable future

Dan Keough, Chairman and CEO/Shareholder, Holmes Murphy

Q
Why has your organization decided to remain independent? What are the most important factors in this decision?
A
Holmes Murphy was founded in 1932, and we’re currently in our fourth generation of leadership. What makes us unique is, when leadership changes from generation to generation, so does the ownership of our company. Being a privately held firm, we are accountable only to the long-term needs of our clients—that is our No. 1 focus. Our culture of private ownership fuels our passion to provide employee ownership opportunities and serve customers. We take purposeful steps to feed the entrepreneurial spirit within our organization. We believe we owe it to former shareholders, employees, customers and our communities to remain private.
Q
How do you prioritize investment dollars, which are limited? What services or technology capabilities differentiate your agency from competition?
A

This is a difficult question in a growth-oriented company. Our leaders compete for investment dollars to expand our growth or meet our customers’ needs. Innovation fuels growth. We are always thinking and looking ahead to see what’s on the horizon and how it could be developed to meet or exceed our clients’ needs. Over the years, Holmes Murphy has created many startups, each one designed to fulfill our clients’ needs to drive down costs and/or create efficiencies.

Our captive and clinical capabilities differentiate us, as well as our expertise in several industry verticals. Most recently, we developed and launched SimplePay Health, which will be a game changer in the healthcare space. SimplePay Health eliminates the confusion and frustration with healthcare in America and replaces it with a new way of doing things. One way, in particular, is you can know the total cost of your medical care before you schedule an appointment.

With regard to technology, we are partnering with companies, are investing in companies, and have formed a team to survey the insurtech landscape to find opportunities. We believe innovation within our company provides employees with the opportunity to change the game, create wealth and drive a culture where ideas are welcome.

Q
Are acquisitions a significant part of your company’s growth plans? How do you identify potential targets and compete against the most active acquirers?
A
Holmes Murphy focuses on acquisitions that include teams of top performers that either fit well within our geographic footprint or expand our capabilities. Additionally, we look for those companies that not only want to partner with us for growth and a love of the business but also fit our culture of being privately owned. Cobb, Strecker, Dunphy, and Zimmermann (CSDZ) is the most recent example of this. This transaction not only helped Holmes Murphy enter the Minneapolis market but also expanded our construction expertise.
Q
What do you see as the future of the middle-market brokerage, given the consolidation that has occurred in the brokerage space over the last number of years?
A
I feel there will always be firms that are fiercely independent and committed to remaining private, like Holmes Murphy. Reaching a size that allows them to remain relevant and provide all the tools of the larger firms will be challenging. As a result, we may see more consolidation of privately held firms with other privately held firms. The opportunity is enormous and will attract the best talent.

Duane Smith, CEO, TrueNorth Companies

Q
Why has your organization decided to remain independent? What are the most important factors in this decision?
A
When we formed TrueNorth in 2001, there were six partners who had the opportunity to experience a way of life that we wanted to preserve and pass down to the next generation. We were able to make a good living, build equity and have a quality of life that allowed us to be present with our families. We recognized that, with many of the aggregations that were occurring, the entrepreneurial opportunities that we experienced went away. Our vision statement, “To build a legacy company with an entrepreneurial platform that attracts, develops and coordinates high-performance talent,” has provided us with the ability to stay committed to and focused on remaining independent.
Q
How do you prioritize investment dollars, which are limited? What services or technology capabilities differentiate your agency from competition?
A
One of the mantras from MarshBerry that resonated with us is: “If you run your company as if it is for sale, you won’t have to sell it.” We have developed an owner’s manual based on four critical indicators that must be in balance: profit, client experience, culture and growth. Profit can be too high at the expense of the other three or too low at the expense of the culture, client experience and growth. We define, measure and manage all four of the KPIs and hold our leaders and people accountable based on these results.
Q
Are acquisitions a significant part of your company’s growth plans? How do you identify potential targets and compete against the most active acquirers?
A
We hired an individual from our industry three years ago to focus on acquisitions and organic growth. Annually we discuss our growth strategy and decide where to invest. Organic growth is generally preferred over M&A, but there are strategic M&A opportunities that can be attractive. With the high valuation multiples, we are currently focusing more efforts toward organic growth. We have developed a subset of our M&A strategy that is focused on smaller “County Seat” opportunities that are below the radar of many of the PE firms.
Q
What do you see as the future of the middle-market brokerage, given the consolidation that has occurred in the brokerage space over the last number of years?
A
Consolidation in our industry can be positive. Providing value to our clients and our market partners is at the heart of what we do. Many agencies struggle to provide a value proposition beyond market access. As technology and access to information become more available, we must focus on value-added services beyond the traditional insurance product. Many of the larger aggregators understand this and are helping brokers provide value. What is lacking in many of the consolidation opportunities is an opportunity for equity and a forum to be innovative. Our answer to that is an entrepreneurial platform that allows high performers to have an equity interest in their respective profit center and develop innovative solutions to their clients’ problems.

The responses above are not the opinions or beliefs of MarshBerry and were supplied by each individual named. —Editor

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