What Is Your ‘Quality of Growth’?

As the insurance brokerage industry has evolved over the last decade, so have the methodologies for measuring the success and value of firms in the world of mergers and acquisitions.

An emerging trend in measuring the potential value of a brokerage targeted for acquisition is its quality of growth (QoG).

QoG is not to be confused with quality of earnings (QoE), which refers to the due diligence process usually conducted by an outside advisor as part of an M&A negotiation to verify the target company’s revenue and earnings against the proposed purchase price.

For many buyers, evaluating the QoG of potential targets provides far more optics and metrics for understanding where a firm’s growth is coming from. QoG looks at firms’ sales velocity compared to growth that is coming from premium rate increases, exposure base changes, or other economic factors.

A decade ago, the question posed by buyers was, “How much are you growing in general?” Five years ago, the question evolved into, “How much are you organically growing compared to acquisition growth?” Today, buyers want to know a firm’s QoG, or how much of its organic growth is coming from net new sales compared to other external influences.

Where a firm’s growth is coming from is now a differentiator for buyers as they evaluate potential acquisitions. Firms that are able to generate a significant portion of their organic growth through higher sales velocity (new business as a percentage of prior year commissions and fees) are standing out from the crowd and likely attracting higher valuations.

According to MarshBerry’s proprietary financial management system, Perspectives for High Performance (PHP), the average organic growth rate for all agencies in 2023 was 9.7%, while top-performing firms (the best 25%) achieved 18.3% growth. When factoring in the impact of premium rate increases and exposure base growth (approximately 7 percentage points), the news is even worse for average firms, whose “real” organic growth was closer to 2.7% (9.7% less the 7% related to rate and exposure growth).

Top firms in 2023 were able to achieve superior sales velocity and superior retention (leakage of only 0.4%). As a result, these firms on average achieved “real” organic growth of approximately 11.3% (18.3% less the 7% related to rate and exposure growth).

While overall numbers are important, buyers want to know if growth is sustainable, if this firm will continue to grow even in less than optimal economic conditions. In a buyer’s eye, a firm’s QoG is impacted by its sales culture, its diversification of offerings, its data and technology capabilities, and its platform for managing activities.

What is your QoG? This hard rate environment won’t last forever. As inflation starts to stabilize and the market softens, only those with a sustainable sales process that adds value to their clients’ businesses will be prepared to continue driving meaningful, quality organic growth.

M&A Market Update

As of May 31, 2024, there have been 242 announced M&A transactions in the United States. This is 7% higher than the 226 transactions announced through this time last year.

Private-capital backed buyers accounted for 177 of the 242 transactions (73.1%) through May. This represents a substantial increase since 2019 when private-capital backed buyers accounted for 59.3% of all transactions.

Independent agencies were buyers in 35 deals so far in 2024, representing 14.5% of the market, a slight decrease from 2023 when independent agency acquisitions represented 15.6% of the market. Transactions in which banks were buyers continued to fall, from 18 transactions in 2022 to nine in 2023—an all-time low. So far in 2024, bank buyers completed only two acquisitions through May.

The top 10 buyers account for 52.1% of all announced transactions, while the top three (BroadStreet Partners, Inszone Insurance, and Hub International) account for 25.2% of the 242 total transactions.

Notable Transactions

• May 2: Hub International announced it acquired California brokerage Merriwether & Williams Insurance Services (MWIS), enhancing its commercial insurance and risk management capabilities. MWIS, which offers contractor development, bonding programs, and special project consulting, will maintain its local management and client relationships while gaining access to Hub’s global resources.
• May 6: USI Insurance Services acquired Hignojos Insurance Agency, a Texas-based firm specializing in commercial and personal risk insurance. Founded in 2009, Hignojos will continue to serve its clients with local, personalized service while gaining access to USI’s broader range of innovative solutions and expertise.
• May 9: Alera Group acquired Texas-based Trimble-Batjer, an established agency founded in 1883 that specializes in surety and bonds, business solutions, employee benefits, and various insurance coverages. The Trimble-Batjer team will remain in their current roles, continuing to serve clients.