At the risk of getting into trouble, I should say from the outset that there is no such thing as an “independent” insurance broker.
ASIC does not allow the use of the word “independent” as insurance brokers receive remuneration in the form of commissions from insurers. Within the industry we typically use the word “independent” to describe the insurance broking firms that are wholly privately owned by the advisers that work within the firm and who work directly with clients.
And as to their whereabouts? Well, the answer is that most of them have gone. Those without an insight to the insurance broking industry over the last few years, would be staggered by the level of acquisition by ASX listed consolidators, US and UK owned brokers or FOBs (Foreign Owned Brokers as they are locally known) and the private equity players.
Recently, the acquisition frenzy has only ramped up further:
- Marsh, the largest broker in the world, acquired JLT the 7th largest
- Aon, the 2nd largest broker in the world, acquired Willis Towers Watson, the third largest broker in the world
- Honan announced their sale to US private equity firm TA Associates
- Austbrokers announced the acquisition of Pemba Capital’s private equity stake in Coverforce, which subsequently fell through
- Insurance House announced their sell down to private equity player, Quentet Yorkway and has recently gone on to acquire several long standing “independent” brokers
In addition, we have seen listed consolidators Steadfast[1] and PSC continue to acquire majority shareholdings in many longstanding brokers.
Editor’s August 2023 Update: How things change… Aon’s acquisition of WTW failed as a result of an impasse with US regulators. TA & Associates sold Honan this month to Marsh. Coverforce subsequently sold to Steadfast in August 2021. Insurance House sold to Steadfast in August 2022
Why the frenzy?
Insurance brokers are resilient businesses with relatively stable, recurring incomes. In a prolonged low interest rate environment, institutional investors and superannuation funds have been attracted to this consistent income stream, subsequently pushing Price Earnings (P/E) multiples of listed brokers to very high levels. This has made the disparity between valuations of listed and private insurance brokers so disparate that it has been simply too attractive for the listed entities to take advantage of the P/E differential via Mergers and Acquisitions (M&A). This in turn has fuelled inorganic profit growth of these entities and only served to make the listed entities even more attractive to investors.
As yet there is no indication of a slowing in M&A, however there is a noticeable trend of advisers leaving the larger corporate brokers to start their own business as authorised representatives, or to join the boutique players. This trend reflects the desire for advisers to operate outside the confines of a behemoth insurance broker; without the bureaucracy and politics that go hand in hand with firms of that size.
What is the impact for stakeholders?
In every business, there are typically three key stakeholders[2]:
- Employees;
- Clients; and
- Shareholders.
I deliberately present them in that order. As a business PNO firmly believes in the philosophy that if your people are happy and engaged, then that will undoubtedly lead to a better client experience resulting in retention, growth and satisfactory returns to shareholders.
For any business, the goal is to correctly balance of the needs of all its stakeholders.
When the shareholders are distant, their understanding of the needs of other stakeholders (employees and clients) is also distant. In our view, this also diminishes the “care factor” of the shareholders as it becomes more focussed on their own needs, or in turn the needs of their own clients – their investors and shareholders.
Nothing emphasised this more strongly to me than in April 2020 when Aon’s global CEO wrote to all employees to advise that 70% of them would receive an immediate 20% pay-cut due to the uncertainty of COVID-19.[3] Three months later, they reversed that decision and advised their NYSE shareholders that their profit in that June 2020 quarter had increased 43% compared with the prior year period.[4]
Similarly, PNO at that time was also concerned with the future of our business. The level of uncertainty was extreme. Like any business, we discussed the “what if” scenarios and the various stages of cost reductions we would have to take if things turned really dire. However, what was different is that we discussed the names of the people in our business and the emotions we felt when several of our employees announced that their partners had been made redundant. We also discussed some of the health and other challenges that some of their families were experiencing. We made the decision that we would not make decisions that would impact on our people until we absolutely had to. We are thankful that time never came.
Aon has had to deal with the resulting fall out of their decision, as have other ASX listed insurance broking businesses who made similar decisions. Staff departures are rarely good for any business and clients are undoubtedly impacted.
A question for employees and clients: Where are the shareholders sitting?
Are they in New York? Are they the head office of a consolidation play or a private equity firm? Or are the real shareholders the fund managers watching the ASX?
Where will they be when our next challenge arises, or times get tough?
One thing I know to be true is that the more distant the shareholders are from the other key stakeholders, the poorer the outcomes for those stakeholders. At PNO, we are proud to be 100% privately owned by individuals that work actively within and are passionate about the business. Our care for our stakeholders (employees, clients and suppliers) is genuine.
Whilst we are ambitious and have strong aspirations to grow, we won’t get caught up in the acquisition frenzy. We are now different to many of our competitors in that our horizon is much longer than theirs. We are taking a 20-year view for all our stakeholders and we look forward to helping them prosper throughout.
[1] PNOinsurance are a member of Steadfast (i.e., we access their services at a cost). They have no shareholding PNOinsurance.
[2] In our business our suppliers (insurers) are an equally relevant stakeholder. Whilst our relationship with our insurer partners is at times respectfully combative, the reality is that if our client’s business is hit with disaster then the insurer is the number one stakeholder in their world (and in turn ours) at that time.
[3] https://www.insurancejournal.com/news/international/2020/04/27/566445.htm
[4] https://ir.aon.com/about-aon/investor-relations/financial-reports/quarterly-and-annual-reports/default.aspx
