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Acrisure United: Everyone is an integrated broker now

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Back in February, I said (tongue in cheek) that “everyone is an integrated broker now”.

I was referring to the new-found mania in the private equity-backed broker space for messaging that emphasized value creation through integration drives. This came after a long period in which deal origination and merger arbitrage were the central management focus.

That piece revealed that the US broking sector’s arch decentralizer Acrisure, a mosaic of 450 agency partners built via 700+ small acquisitions, had started on its own journey to integrate.

But at that point Acrisure’s plan was a pilot of voluntary integration of 6-8 agencies in a handful of states, which if successful it intended to roll-out to all states, with an ultimate destination of regional platforms.

On Monday, the companyrevealed it was had already decided to pull the trigger on that transformation with the pilots still in their infancy, and that it was going to skip straight to regional platforms with some specialty practices to follow.

It also flagged the move to a unified Acrisure brand, and an intention to adopt a “total client view” that would see insurance brokers seeking to offer clients a much broader suite of products.

The platform roll-out will begin over the next 30 days and take several quarters to be completed, Acrisure said.

With the single brand, emphasis on breadth of capabilities, and focus on a single point of client contact, the company could perhaps have called its new operating model Acrisure United.

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Even given what was sign-posted earlier this year, this represents a stunning pivot from a business that has spent the last decade telling a story to acquisition targets that emphasizes autonomy.

Agency principals were offered the chance to rally to Acrisure’s banner, partially monetizing and with the promise of further wealth creation at the group level, without compromising their ability to run their own business under their own brand.

It is often challenging in managing stakeholder relations to change the fundamentals of your story – even if it is necessary as a company matures. (And Acrisure has moved from a ~$900mn revenue business in 2018 to a $3.9bn revenue business last year.)

The trade-off for Acrisure of pivoting its operating model could be greater difficulty in sourcing M&A targets in the future.

The imperative to integrate

The imperative to integrate reflects a changing paradigm for the private brokers, with Boom Times giving way to what this publication has called The Squeeze.

This reflects the increased cost of capital and the prospects of a lower growth environment resulting from a slowing economy, and slower M&A deal velocities. (See: “Levered brokers: Boom Times give way to The Squeeze”).

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In addition, after a remarkable expansion of private markets and a great decade-plus run for private equity in the broking sector, the days of automatic home runs for every deal are over. The herd of buyers is thinning, the pushback on earnings adjustments growing, and platform multiples are showing pressure. (For background see: “Hub’s valuation: A shiver passes through the private broking sector”).

The imperative to integrate is driven by three opportunities brokers feel they need to tap in a weaker operating environment.

First, integration offers the prospect of self-generated growth in an environment where the tailwinds from the brokerage supercycle are set to dissipate.

With market growth expected to fall when the commercial P&C and (ultimately) personal lines cycles wane, alongside falling inflation and slowing economic growth, it will become more important to beat the market on growth.

The original 2021 brokerage supercycle has morphed into the Supercycle 2.0, with inflation, property revaluations, increased reinsurance costs and hardening in personal lines sustaining organic growth – and, in the US SME/mid-market space creating a new peak of growth in Q1 at ~10%.

But these tailwinds have already extended beyond even the most optimistic expectations, and cannot continue forever.

Effective integration through things like group centers of excellence, product, data analytics and training – as well as improved placement strategy – are perceived as a route to outperforming on organic growth.

Second, integration is perceived as a path to margin improvement, which brokers will have to lean on more heavily for value creation in a slower growth environment.

The market correctly believes that well-run, fully integrated firms can operate at higher margins than businesses that are effectively confederacies.

And private equity owners are now keen to focus on harvesting synergies that were left on the vine in the scramble for deals.

The issue is that typically significant investment is needed in the short term to create the systems, technology and capabilities needed to run an integrated firm.

And companies that have previously been focused on M&A origination, engaging with capital markets and driving sales need to have the operational wherewithal to see through a complex change program that their agency principals may not want.

Third, the story behind the story with integration may ultimately be about the private brokers positioning themselves for a phase of the “consolidation of consolidators”.

Ultimately these businesses are focused around building equity value over time through a cycle of refinances, and a potential ultimate full exit.

Integration likely increases options here. Firms that are perceived as “spreadsheets, not franchises” are poorly placed to sell themselves to other platforms. (It is hard to convince an acquirer to write a check at a full multiple if they feel they have to diligence hundreds of firms, not one.)

For others, they will want to position themselves as dominant partners in these merger deals, something which will be close to impossible if they are fragmented and operationally weak.

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There is another variant on the imperative, which is more applicable to Acrisure. The company has long been limbering up for an IPO, and this is the natural move for the business as it seeks to de-lever and de-risk.

To IPO, the firm – which I have described in the past as “the Confederation of Acrisure” – has to be compliant with the Sarbanes-Oxley Act, which sets a high bar for public companies around things like audit, financial reporting and fraud prevention.

Integration is the obvious path to compliance, which may make it a necessary interim step to a listing for Acrisure – or any of the prolific privately-owned consolidators in US broking.