Speaker 1:
Welcome to Insight Exchange, presented by L.E.K. Consulting, a global strategy consultancy that helps business leaders seize competitive advantage and amplify growth. Insight Exchange is our forum dedicated to the free, open, and unbiased exchange of the insights and ideas that are driving business into the future. We exchange insights with the brightest minds of the day, the most daring innovators, and the doers who are right now rebuilding the world around us.
Marcela Santacoloma:
Welcome. Thank you for joining us. In this podcast episode, we explore internationalization of commercial insurance broking, the next wave of consolidation. Our focus rests upon the intricate dynamics of the commercial insurance broking markets, where the trends of consolidation and transformative M&A have engendered significant shape. We will discuss the essence of an international consolidation thesis and the value creation opportunities of this strategy. To provide insights on this topic, we welcome our experts, Gigi Wong and Sam Halliday, partners at L.E.K. Welcome, Sam and Gigi. Thanks for coming to talk to us today. Would you please each take a moment to introduce yourselves?
Gigi Wong:
Sure. Thanks so much, Marcela. Hi everyone, I'm Gigi Wong. I'm a partner in our San Francisco office. I help lead L.E.K.'s work in financial services and fintech. While the financial services and fintech practice in L.E.K. most certainly covers a wide range of sub-sectors, insurance and insurtech is a large part of the work that we do, and we've had a chance to help strategic and financial players in the insurance ecosystem think through their growth and M&A strategy.
Sam Halliday:
Thanks, Gigi, Marcela. Hi there, Sam Hilliday, a partner at L.E.K.'s London office where I help lead our work in financial services and insurance more specifically. We cover a broad range of topics in the sector from distribution to capital side and services players into the sector. Clearly ongoing consolidation, the agency broker layer has and continues to be a big topic of conversation.
Marcela Santacoloma:
Thank you both. So to start out, could you provide some context on the consolidation of insurance brokers in domestic markets? What has driven these trends? Why are we talking about it?
Gigi Wong:
Thanks, Marcela, happy to. Broking markets have attracted significant private capital, PE and debt thanks to the high degree of fragmentation and the highly recurring revenue nature of their income streams. These two characteristics have driven consolidation and allowed for value creation through buy and build strategies and the delivery of revenue and cost synergies and ultimately multiple arbitrage.
Sam Halliday:
In some markets, namely the UK again, given the relatively speaking later stage nature of the market, we've seen deals between consolidators, but this still accounts for a minority of the deals in the market and hasn't been another feature in other places, where instead the focus has been on expanding internationally.
Marcela Santacoloma:
Thank you both. Those brokers looking cross-border or international markets, is that what you talk about in the new wave of consolidation? And can you please explain why is this happening now?
Gigi Wong:
Well, the increased pace of consolidation with highly competitive M&A activity and reduced domestic headroom have driven an increase in roll-up multiples while also acting to drive down the multiples the platforms themselves can attract. Given the operational complexity of acquiring other consolidators in the domestic market, large brokers have started to look at the more fragmented international markets for growth, often with initially lower valuations and the ability to aggressively increase their total addressable market.
Sam Halliday:
This is the case of brokers in the UK and the US. We've also seen this trend across Europe with platforms originating from the Nordics, Benelux, and German, and Dutch markets where they've built real regional scale and look to expand outside of those regions, even. Here, brokers have looked to escape the confines of domestic headroom and build multi-country platforms with real ability to scale on a relatively speaking unlimited nature.
Marcela Santacoloma:
And what would you say is the value creation thesis for this international consolidation strategy? From a shareholder perspective?
Gigi Wong:
We believe that an international consolidation thesis can work from a shareholder's perspective, but there needs to be a few things that it's based on. One, continued ability of the platform to buy a lower multiple set of businesses. Two, the materialization of direct synergies, and three, the ability to deliver on the significant, but untapped opportunity in indirect or best practice synergies.
Marcela Santacoloma:
Can you please elaborate on those direct synergies? What are these?
Sam Halliday:
There are three direct synergies related to placement and capacity management. Maybe I'll go through those first, and Gigi, you can fill in on the others. Firstly, on placement of international premiums into London, if you have a capability to access London, then you can capture some synergies as you acquire into local domestic markets as you place that back through your London platform. Secondly, for those who've got MGAs, there is the capability to take those MGAs and extend capacity agreements across multiple markets, really allowing you to deploy your proprietary capacity as you see fit. And thirdly, in the long term, we see opportunity for capacity deals with international carriers, particularly in markets and regions like Europe where there are multi-country insurers and multi-country brokers. We see the future of these two coming together with real benefits for all involved.
Gigi Wong:
In addition to the capacity synergies that Sam just mentioned, I would add there are direct synergies related to: one, centralization of functional capabilities really around aggregating functions like cybersecurity, finance, and M&A teams, as well as cross-pollination of client leads across geographies. For those brokers who serve larger corporate clients, a multi-jurisdiction synergy is an opportunity to have a viable path to winning and serving those client segments across multiple geographies. The location of those clients could also be considered when assessing target geographies to enter.
Marcela Santacoloma:
When we talked about the investment thesis from the shareholder perspective on this internationalization strategy, you also talked about synergies of learning or best practice synergies. Can you please elaborate on those?
Sam Halliday:
These indirect or best practice synergies relate to the value creation potential by transferring best practices out of large scale platforms in core markets towards smaller platforms in newer expanding markets. This could be a range of things. Firstly, it could be more commercial excellence or sales effectiveness-minded around top line growth performance driving new business, retention, cross-selling. Secondly, it could be around the product axis that could be expanding coverages areas like cyber or DNO or a broader product set outside of insurance as well. Thirdly, around how you manage your capacity. That could be in the form of capacity harmonization, it could be in the form of overrider structures and deals on top with key strategic carriers. And lastly, it could be around the operational performance and efficiency of the business, really driving value out of the more transactional automatable activities within businesses.
Marcela Santacoloma:
Thanks, Sam. So now that you talked about the cost side or the operational efficiency, one thing that always gets mentioned is the integration effectiveness. Gigi, could you talk to us about what are the key enablers of the successful integration? And specifically in a cross-border buy and build strategy.
Gigi Wong:
Integration enablers would not be different from those typically applied by private capital investors in their own portfolio businesses. These could include a number of things, including M&A support from a dedicated team with adequate size and capabilities, supporting the build-out of a structured search strategy to assess more proprietary bilateral deals, helping due diligence as well as helping negotiation capabilities. Once the acquisitions are executed. There's also need for integration and PMO support with adequate change and project management governance, constant tracking and reporting of synergies, and once again, best practice sharing from prior experiences. There's also investment in central technology capabilities to support local initiatives to increase broker productivity and operational efficiency, as well as reducing costs and increasing margins. And last but not least, central investments in data and analytic capabilities drives value by providing improved data visibility and enhances decision-making processes. MI dashboards to track performance at a granular level can aid in the management of initiatives and value creation.
Marcela Santacoloma:
Thanks, Gigi. So Sam, I know that many times we talk about the technology stack of the brokers and how it is different because of some of these tech providers are more domestic. Can you please talk about that a little bit for our audience?
Sam Halliday:
Sure. It's complicated for brokers to deliver value in a very simple way with the technology estate, given there are quite local domestic markets or broking software houses, but there's a lot of value to be added outside of the core ledger system. And actually developing capabilities around CRM, around commercial effectiveness, around pipeline management can all go on top of local capabilities and local systems in market. So it's just one more area where really building a scale organization cross-region can add quite a lot of value to broker operations.
Marcela Santacoloma:
Great. Thanks, Sam and Gigi, it was great to talk to you about the next wave of consolidation for insurance brokers today and going through the value drivers of this cross-border strategy that we have been supporting our clients with for the last few months. So it's exciting to be talking about this. To summarize, we talked about brokers pursuing an internationalization strategy as a result of the reduced domestic headroom and the higher valuation multiples. But then this international strategy allows for the expansion of the [inaudible 00:10:42], the continued ability to buy attractive multiples, but also the ability to create value through the materialization of direct synergies like the capacity management strategies that Sam was mentioning and the indirect synergies through showing best practices around commercial excellence. Again, operational efficiency and M&A execution and integration. Sam and Gigi, thank you for sharing your views with us today. Is there anything else you would like to add? Any last thoughts?
Sam Halliday:
Thanks for the discussion. It was really interesting. This is a topic we're constantly supporting our clients on and the key strategic questions are truly important to the management teams, investors we work with in the space. Probably the most critical ones at the moment are really around how that M&A strategy is structured and is there clear guidelines in place around the level of synergy being targeted and actually practically achievable? Are those synergies ultimately being delivered? Can we see the best practice in the indirect value flowing through the business? And do they have a clear and coordinated integration plan to ensure success on the ground in the new local market?
Gigi Wong:
And to our listeners, we're always happy to provide more detailed discussions on request. Please connect with us to learn more about L.E.K. Consulting's extensive experience in providing strategic support to subscription-based and growth-focused businesses and investors who are looking to implement internationalization strategy that contributes to value creation.
Speaker 1:
Thank you, our listeners for joining us today at the Insight Exchange presented by L.E.K. Consulting. Links to resources mentioned in this podcast can be found in the show notes. Please subscribe or follow for future episodes wherever you listen to your podcasts. Also, we encourage you to submit your suggestions for future insights online at lek.com.
