The state of play in insurance mergers and acquisitions (M&A) is headed for change as higher interest rates and recession fears prompt investors to pull back on capital.
One insurance CEO believes that the days of “doing consolidation for the sake of it” are over.
“I think if you become a levered platform and do huge consolidation for the sake of huge consolidation, eventually, the music stops,” said Rusty Reid, CEO of Higginbotham, an insurance, financial and HR services firm based in Texas.
“That’s what's going on in the industry today. Rates aren't free anymore. You’re going to start seeing some changes.”
Reid explained that significant and predictable cash flow lending in the past has prompted many investors to seize opportunities in the insurance space.
But firms that are only seeking “financial play” are not going to have the same leverage as before.
“We’ve already seen a significant slowdown [in M&A], and you'll continue to see a significant slowdown where it was more about financial arbitrage not building a great business,” Reid told Insurance Business.
Higginbotham is one largest independent insurance brokerages in the US, as well as the largest in Texas by revenue.
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The company, which is celebrating its 75th anniversary this year, is an active player in the M&A space. Most recently, it announced its expansion to Universal City, Texas and entry to the state of Missouri through acquisitions of TrustStar Insurance Services and Connell Insurance, respectively.
Higginbotham’s footprint across the US spans 15 states and 87 offices, according to Reid.
The CEO highlighted a “dual growth” strategy for the firm as it seeks continued growth beyond 75 years.
“We want to grow organically, and we want to also bring in great partners. Half of our growth comes from good old-fashioned organic growth, which is about retaining and finding new clients but then also, we are still bringing in new partners and helping them grow,” Reid said.
The company uses an employee shareholder model, which allows employees to directly benefit from its growth. The scheme began in 1989, and Reid credits it for Higginbotham’s exponential growth and ability to attract and retain top talent.
“We're not out just to buy revenue for the sake of buying revenue, we really do go to look to find great partners,” the CEO said.
“98.2% of our partners are much larger today than when they joined us. To me, that checks the box that [our strategy] is working.”
Higginbotham wants to create a significant presence in new markets by leveraging its existing partnerships. But at the same time, the firm is also focused on “building out” across its existing markets.
Reid said Higginbotham might consider expanding into the southern regions in due course.
“When we come into a newer market, such as Georgia or Tennessee, we don't want to just have a small presence there,” he said.
“There’s still work to build out in other markets that we're in. But you can't help but look much further than the Midwest and see similarities between Texas and the South. I suspect that that could be our next target on the horizon.
“Right now, we're sticking to where we are. But certainly, if we find great partners in that part of the country, then that would certainly lead to appropriate expansion.”
Insurance M&A has been stung by global events including the COVID-19 pandemic, the war in Ukraine, fears of recession, higher interest rates, and risks associated with the recent banking crisis.
According to a Deloitte study, deal volume in the US and Bermuda fell more than 27% in 2022 compared to the previous year, when M&A activity was seen to have peaked. Overall deal value dropped 69% in 2022 versus 2021.
Deloitte told Insurance Business that last year’s M&A slowdown has carried over into 2023, but that the market would recover towards the end of the year, when interest rates settle down.
Independent specialist insurer and reinsurer BMS said that growth appetite remains in the insurance M&A market despite challenging macroeconomic challenges.
According to Reid, brokers with an eye towards steady growth, like Higginbotham, should be able to continue their expansion.
“We’re an insurance broker that has a dual growth strategy to build very measured growth. We'll continue to do that,” he said.
“We view [the current environment] as a great opportunity for us to continue with our strategy. There'll be some unwinding, and for people that want to join a firm like ours, we will be here with arms wide open.”
Do you agree with Reid’s assessment of the current M&A environment? Let us know your thoughts in the comments.
