Back in Fashion

A quarter-century ago, personal lines insurance was sold primarily by exclusive agents at direct insurance companies.

The agents marketed and sold products such as automobile insurance, homeowners and renters insurance, and umbrella liability insurance based on the cheapest price, making the products a commodity similar to flour and rice despite the inherent complexity of the insurance contracts involved.

Although independent agencies and insurance brokerages also sold personal lines policies, their business focus generally tended toward commercial lines insurance products for small and large corporate clients. The concentration on commercial lines was so intense that more than a few brokerages in the 1990s decided to get out of personal lines altogether.

“We had some large clients at the time that sold off their personal lines book,” recalls Kevin Stipe, president of Reagan Consulting, a strategic advisor to insurance intermediaries on mergers, acquisitions and divestitures. “They didn’t want the distraction.”

For many years thereafter, the emphasis on commercial lines remained, with less attention paid to personal lines. As insurtechs came on the scene a dozen years ago, looking to sell car insurance and homeowners policies at prices lower than the direct writers were charging, midsize and larger brokerages and agencies decreased their interest in personal lines even further, investing the bulk of their capital into developing more sophisticated risk-management and other consulting services for commercial clients.

Fast-forward to today, and a very different trend is under way. Brokerages are gobbling up retail independent agencies across the country, driven for the most part by the agencies’ personal lines book of business. This is especially the case if the agency’s clients are wealthy or ultra-wealthy individuals.

A case in point is Marsh & McLennan Agency (MMA), the middle-market agency subsidiary of giant brokerage Marsh. Over the past 11 years, MMA has acquired 78 agencies, largely because the agency already served the insurance and risk-management needs of affluent families in their community.
“It’s a huge part of what we do today,” says MMA chairman and CEO Dave Eslick. “Carriers have a substantial appetite for this business, making it a place for us to differentiate our value proposition.” (See companion story “Rich Desserts.”)

It’s Profitable

This corner of the industry is known as private client services, and it has become quite profitable for many insurance intermediaries. At a time when the property and casualty insurance market is hardening after one of the most protracted soft markets in history, premiums across all personal lines policies are rising. Homeowners insurance rates, for instance, rose 4.5% in the fourth quarter of 2019, according to a recent study by MarketScout. The study also found that premiums rose as high as 35% for homeowners in catastrophe-exposed regions.

In addition, the current economic upswing is lifting consumer incomes, which means many people have more assets to protect, adding to the aggregate value of their coverage.

Another reason for brokerages’ renewed interest in personal lines is the opportunity to place tough risks through wholesalers—and the higher payout for doing so. In states such as California, Texas and Florida, standard market insurers in regions prone to wildfire and hurricane losses have pulled up stakes, putting many affluent policyholders in a bind to find coverage. Brokerages and MGAs are able to reap substantial commissions from the higher premiums charged by specialty insurers to protect these individuals’ expensive homes.

Over the past three years, Stipe says, Reagan’s annual surveys of the 100 largest agencies and brokerages indicate about half saw revenue grow by more than 3%. “A decade ago,” he says, “it wasn’t even close to 2%. Even after the economy recovered in 2011, it still wasn’t 2%. We just did our latest survey, which shows revenues growing at close to 4%—more than double what it has historically been.”

That’s just revenue. Stipe’s data also indicate personal lines is more profitable for brokers than traditional commercial lines. “This is sticky business, meaning that today’s customers are likely to be tomorrow’s customers,” he says. “And everyone wants a bigger piece.”

Building Scale to Lower Costs

The financial returns on personal lines have created intense competition across the industry to increase market share. Giant, publicly traded brokerages like Marsh, Aon and Willis Towers Watson, sizable private-equity backed brokerages like Hub and Acrisure, and insurance franchisers like Brightway and Goosehead are sharpening their knives to gorge on smaller brokerages and agencies with substantial personal lines books. “The M&A community loves personal lines business right now and will pay as high a multiple as needed to get it,” Stipe says. “Remember those books of business I mentioned that brokers sold off back in the 1990s? Today, they’d be worth three times revenue and then some.”

Among the firms in the crosshairs are thousands of small “Mom and Pop” independent agencies across the country. Through the decades, these multigenerational agencies have met the insurance needs of friends, neighbors and local businesses, offering property and casualty policies with different limits, coverages and price points from a variety of carriers.

Unlike the agents at personal lines insurers like Allstate and State Farm, these agents own and run their own businesses, in many cases inherited from prior generations. They have nurtured close relationships with their clients, sharing a beer at the local Rotary Club, going to their kids’ weddings and attending family funerals.

For more than a century, this model of service worked well for these local independent agencies and the insurers they represented. But insurers are eager to find ways to reduce their cost of distribution, which has bitten deeply into revenue and profits.

“About half the personal lines premium dollar today goes to distribution, with maybe 40% going to underwriting and the rest to customer service,” says Kaenan Hertz, managing partner at InsurTech Advisors, which connects midsize and smaller insurance carriers to startups in the insurtech space.
Carriers are responding to the high cost of distribution by restricting the business they conduct with small independent agencies generating premiums below a certain threshold. In response, many small agencies have grouped together into clusters to provide a carrier with a combined book of business exceeding the minimum premium threshold. The cluster also enables the agency members to share in the cost of administrative systems and modern customer-facing technology tools.

A similar concept is in play at private-equity backed brokerages like Hub and Acrisure, though instead of clustering with other brokerages, they are using their PE funding to build scale via an accelerating number of acquisitions. A 2020 study by M&A advisory firm MarshBerry cited 625 publicly announced transactions of independent agencies last year, an all-time high that trounced the prior year’s record 580 deals. MarshBerry’s president of financial advisory, Phil Trem, says demand for more deals shows “no sign of a slowdown.”

As demand intensifies, it is rapidly driving higher deal valuations. According to MarshBerry, the average base purchase price of a retail agency in 2019 was 9.05 times the agency’s EBIDTA (earnings before interest, taxes, depreciation and amortization), up 5% from 2018. The deal activity is so hot, Trem says, even underperforming agencies are being snapped up. “Buyers are not backing off from taking on the risks of an asset’s performance … [and are] stepping up to offer higher proceeds at closing as the acquisition market remains very competitive

According to MarshBerry, Acrisure tops the buyer list in 2019 with 68 publicly announced transactions. Hub was the second most active buyer in 2019, with 45 announced U.S.–based transactions.

“Our interest in personal lines is part of our history,” says Neil Hughes, president of Hub personal lines and the U.S. central region. “We built our business on personal lines, which represents 20% of our book today. Other large brokers lately have become more interested in personal lines, but this has always been a pillar for us.” In 2020, Hughes says, Hub plans to pursue more acquisitions of agencies with both commercial and personal lines.
Possible acquisitions in 2020 include the many agencies that were formerly exclusive to the large insurer Nationwide Mutual, which is shifting to an independent agency model of distribution. Approximately 2,000 Nationwide agencies have been given notice they will need to become independent entities in the future to maintain business with the large carrier, although Hughes says he’s heard the number is significantly higher.

“We’ve been told the agents have 18 months to figure out what to do,” Hughes says. “Some are retiring, and some are going to Hub. Last year, for instance, we acquired about a dozen of them.” He calls Hub a “natural landing spot” for the agencies. “We’ve been in the space a long time, have good brand recognition, and can give them tech tools and other resources to better serve their personal lines customers,” Hughes says.

Acrisure’s appetite for independent agencies with significant personal lines market share is even stronger. In the past two years the firm has completed about 200 acquisitions, and it has brought in more than 500 since its founding in 2005. “There’s a lot to be said for personal lines business right now, including higher premiums and solid retentions—if you service it right,” says Nick Jemas, who heads up Acrisure’s national personal lines practice.

After the Sale

Once an agency is purchased, the acquirer must then decide how it wants to integrate it (or not) into the larger organization. When Acrisure acquires an agency, it becomes a partnering firm. Management is often retained, as is the firm’s brand name. The agents also have a fair degree of local autonomy—important to maintaining the customer relationships cultivated over the years. “Why would we disrupt how they do business when we specifically chose to partner with them for it?” Jemas explains. “This is a relationship business and always will be.”

In return, Acrisure offers the agencies access to its resources. They include a suite of AI-embedded digital technology tools the agencies might not have been able to acquire as independent entities. The technology is designed to handle premium quoting and policy binding processes, making these customer experiences more frictionless.

Like other brokerages, Acrisure segments the personal lines market into different categories—small, mid-market and high-net-worth individuals—each with specific customer service needs. “You need to ‘touch’ these customers in different ways with services tailored to their different requirements,” Jemas says. “Transactions with mid-market clients might involve the need for services from an account advisor, whereas high-net-worth clients would involve much higher counsel and risk-management advisory services.”In segmenting personal lines markets, many brokerages are restructuring their management operations. “We’re seeing more brokers designating someone in the firm as the personal lines leader and then tasking this person with growing the book,” says Stipe, from Reagan Consulting. “The practice leader also is accountable to hire people who can produce more business, encourage the services staff to be more thoughtful about cross-selling, and really getting everyone engaged to eke more out of the personal lines market. We’re also seeing more capital being invested in the business to make it more efficient, thereby reducing overall distribution costs”

Wholesale Mania

More than traditional brokerages are looking to increase their personal lines revenue. Wholesalers, which provide access to the excess and surplus lines markets to insure difficult-to-place personal lines risks, also are beefing up their books, in large part to address increased property risks caused by natural disasters.

“The recent wildfires in California and hurricanes in the Southeast and Texas are creating an opportunity for us,” says Dave Adcock, co-president of the national personal lines practice at wholesale brokerage RT Specialty. As the market hardens, Adcock says, capacity in the standard markets is restricted. Consequently, retail agents seek wholesalers that have capacity in non-standard markets to place the business.

This is certainly the case in California, where insurers are restricting the number of homes they insure in fire-prone regions. Homeowners in towns like Idyllwild, a century-old mountain village two hours east of Los Angeles, lost their homeowners insurance from standard insurers following the 2018 Cranston fire. Wholesale brokers came to their rescue, piecing together coverages from two or more specialty insurers and the California FAIR Plan, the state’s insurance market of last resort.

Consolidation in general is huge in the wholesale business, and personal lines is a part of that dynamic. RT Specialty is expanding its personal lines business by acquiring other wholesalers with personal lines businesses, including Atlantic Specialty Lines, which will expand RT’s mid-Atlantic business, and Myron Steves, a Texas-based wholesaler with 200 employees spread across Houston, Austin, Dallas and San Antonio. As it extends its market reach, RT Specialty also is investing capital in more frictionless technology systems connecting the wholesaler to retail agents. Those systems are being rolled out across its national footprint this year.

Claudia May, RT Specialty’s other national personal lines practice co-president, says the new system’s agent dashboard makes it easier to start a submission, receive a quote online and bind the policy. “The turnaround time is very quick,” May says. “Everything the retail agent needs is in that dashboard.”

Another large MGA, Burns & Wilcox, has experienced a 30% spike in new business since launching a new personal lines practice group structure in 2019, says Bill Gatewood, senior vice president and national practice leader for personal insurance. Although the MGA has brokered personal lines insurance for its retail agent customers for 20 years, it was not a prime focus. There was even a time when it considered exiting the market.
“There was some internal pushback on remaining in personal lines, but we forged ahead and now it’s a big part of what we do,” says Gatewood. “The more complicated the exposure, the less the standard market will have appetite and capacity for this business. That’s where we come in.”

He says the firm has experienced a big uptick in business in catastrophe-exposed areas. “Realtors in California will not take a listing now unless there is proof that a home for sale is insurable,” Gatewood says. “With the standard markets contracting, that opens the door wide for us to write these exposures.”

He pointed to the many large and expensive homes vulnerable to wildfires along California’s mountainous coastline. The 2018 Woolsey Fire destroyed the homes of wealthy celebrities like actor Gerard Butler, reality star Caitlyn Jenner and singers Miley Cyrus, Robin Thicke and Neil Young, among others.

“People with homes in brush-exposed areas, with homes worth $20 million, are having real trouble finding insurance,” Gatewood says. “They’re desperate to get insurance and will pay most any price. To put it together, retail agents and brokers are coming to us. We’re tenacious when it comes to placing complex risks other MGAs might blanch at.”

This sea change in personal lines insurance is expected to continue, with most brokerages planning to snap up smaller agencies now and in the foreseeable future, redefining the marketplace. As a result, the days of calling personal lines a commodity appear to be over. The brokers who solve today’s complex exposure problems through more customized insurance programs and sophisticated consulting advice should do just fine as the personal lines landscape is redrawn. After all, personal lines has always been personal, the very essence of a relationship business.