Business Breakdowns
· Aaron Cohen
[00:00:00] S1: So you have to split up the industry: personal lines and commercial lines. Of course we all are familiar with the very successful direct-to-consumer personal lines of GEICO and Progressive. They have taken market share away from brokers over the last 20 years. That being said, their market share growth has slowed recently. On the commercial side, you don't see—we call it consumer, but direct-to-the-business relationships from the carriers. And there's a lot of reasons for that. But most importantly it's because the insurance broker plays a very important role that some people don't appreciate. And that's an advisor. If you're a mid-sized business or a family business that has 20 trucks that does short-term deliveries around a certain geography, your entire family's net worth is tied up in that business. And the one thing that could bring that down is not having the right coverage, not having the right liability coverage if one of your drivers gets in an accident, not having the right coverage if one of your drivers is hurt, not having the right coverage if you ruin some of the product that's on your truck. So the CEOs and leaderships of these small and mid-sized businesses value the insurance broker's advice. They value their advice around deductibles, what insurance they need, what insurance they don't need. And I think another aspect of insurance brokerage that's evolving is specialization. Because a lot of industries are becoming more and more regulated and your insurance broker really needs to understand and follow the industry to be able to evolve your insurance and make sure you have the right protection. And that is something that has been driving the consolidation in this industry, especially for the last 10 years. And our investment at Assured Partners, this was definitely one of the drivers of the success is we had centers of excellence. So the traditional insurance broker—think of a small to mid-sized town—they're insuring everyone on Main Street, they're insuring the barbershop, they're insuring the plumber, they're insuring the person who owns a bunch of trucks to deliver on behalf of Amazon. And they're truly generalists. And now what has happened is they don't have the expertise to be able to change their advice based on small changes in a specific industry because they're just too busy.
· Aaron Cohen, Matt Reustle
So if you think about something at Assured Partners, we had long-term care facilities. That industry is driven by Medicare and the payers. And as you know how complex the health insurance industry and just health in general is in our country, you need someone who really understands the industry, understands if you're taking on Medicare patients, are there certain types of insurance that the government mandates you to have. And therefore the specialization in this industry is what's driving the acquisition flow as well. And when you look at that, you see a tremendous opportunity because what happens is retention goes up with your customers. And retention has always been fantastic in this industry. But the generalists have high 80s, low 90% retention. The specialists, they're in the mid to high 90s because they understand your business. [00:00:00] S0: And when you think about that specialization and how it would translate to the bigger businesses, maybe the acquirers of businesses. In your mind, is the ideal insurance brokerage one with several segments each with their specialists in those categories, or is it pure play where it's a business and while it might have scale, it's specialized in one specific line or insurance type?
· Matt Reustle, Aaron Cohen
[00:00:00] S0: And when you think about that specialization and how it would translate to the bigger businesses, maybe the acquirers of businesses. In your mind, is the ideal insurance brokerage one with several segments each with their specialists in those categories, or is it pure play where it's a business and while it might have scale, it's specialized in one specific line or insurance type? [00:00:00] S1: You know, Matt, what's funny is I joke internally at GTCR. I love insurance brokerage because of one word: diversification. And I mean that across every aspect of this business. Insurance brokerage, you need to be diversified across carriers, you need to be diversified across customers, you need to be diversified across producers, and you need to be diversified across end markets. So you can have multiple specialization focus within one broker. And I think that builds a better, more sustainable business. [00:00:00] S0: When you are stepping into an insurance brokerage business and you're thinking about laying out the plan of attack, can you talk a little bit about if there is a playbook or if there is a strategy ranking what you're typically looking to do alongside that leader that you're either putting in place or that is already there?
· Aaron Cohen
[00:00:00] S1: So I'm going to go back to the last question, which used the word diversification. We don't want to invest in an insurance broker that is highly dependent on one carrier or one broker. You'll see that a lot, especially in the small acquisitions we've done in the past where two or three brokers basically are the entire business. They own all the customer relationships. Then you're just reliant on those people. And the question really becomes: who owns the business? Is it you or the broker who owns the customer relationship? So we want some level of diversification. Number two, I'd say we're looking for some basic centralized infrastructure. They have the right agency management system, they have the appropriate technology to support the brokers. We'll invest in that. But if you're looking at a specific broker, you want them to have that. And then most importantly, it's all about the people. This is a business where we don't have machines making widgets. We have people, human beings with emotion and personal lives who have to go out and satisfy our existing customers and win new customers every single day. And you need to have great leaders who understand that and know how to work and partner with the brokers and the entire organization to be able to drive success. Because if a broker's unhappy with his job or something's going on in his life, we all have had good days and bad days. Machines don't have emotion. It's wonderful. They just keep on plowing along. But here it's all about having CEOs and regional leaders who have great EQ and could partner with their sales folks and people in the market to be able to drive business.
· Matt Reustle
[00:00:00] S0: As you think about the competition, I think what you mentioned in terms of operating the business, the importance of the people involved all the way down from the top to the producers, that stands out when they're actually out there looking to make the sales. What does competition actually look like and how fierce is that? When you're thinking about whether it's maintaining the retention rates are quite impressive, but not just maintaining, actually growing the business. What comes into play with the business model in terms of just winning more business in the future?
· Aaron Cohen
[00:00:00] S1: There is a tremendous amount of competition in this industry. As you could go through the list of the top 20 insurance brokers, they're probably all billion dollar plus companies. So there's a tremendous amount of competition. That being said, as you mentioned, retention is very, very strong in this industry. And the irony is this is an industry and I've never seen any other industry like this. We don't set our price, so our customers are not shopping the insurance broker's price. Sometimes they're shopping the carrier's price, which if you're doing your job as an insurance broker, you're giving multiple options to your customer and finding them the best price. So it's an industry where you don't set your price and your customers don't shop your price. So the irony is in the industry where there's what we call hard and soft markets. Hard markets are rising rates, rising premiums for a bunch of reasons we could talk about if you want, or soft market, when rates are coming down. In a rising rate environment, in a hard market is a lot of times when you see some attrition, because even though you're getting the best rate for your customer, if their rate went up 15%, even though you've gotten them five quotes from the five largest and most respected insurance carriers out there, they just feel like they need to shop it. And that's when you see some attrition, even though it's outside the control of the broker. And a lot of times they're not going to get a better price from someone else. But sometimes you just feel like they want to see that change. So it's something very unique in this industry that you don't see in many others. The other thing I'd say is where we've seen retention grow and organic growth accelerate is once we buy some of these acquisitions, a lot of times people say you buy the founder out, they're done. You see growth slow. We've actually seen the inverse because what we've seen is we'll buy out a founder. A lot of times that founder will roll a significant amount of their proceeds into our business. Assured Partners is the most recent one. And then they're freed up to be able to go out and grow their business and not have the handcuffs of dealing with all the corporate stuff. But then most importantly, they get access to our center of excellence.