The purchase of Relation Insurance Inc. by private equity investor Aquiline Capital Partners LLC earlier this year marks a new phase for the Walnut Creek, California-based brokerage. Since the deal was announced, Relation, the 38th-largest brokerage of U.S. business according to Business Insurance’s latest ranking, has taken on a new chief financial officer and a new head of mergers and acquisitions, and last month announced its expansion into the central U.S. with the purchase of Premier Consulting Partners in Tulsa, Oklahoma. With ambitions to grow its business and expand its footprint, the brokerage plans more deals. CEO Joe Tatum recently spoke with Business Insurance Editor Gavin Souter about Relation’s strategy and the market environment for brokerage M&As.
Q: What was the background of the Aquiline deal, and what does it mean for the firm?
A: We talked with a number of private equity firms, and Aquiline was the clear choice. It was just their deep understanding, by the senior leadership and the entire team, of the insurance space, and when we were having the conversations with them we were completing each other’s sentences.
Q: What does it mean for you going forward?
A: Aquiline has made a strategic investment, but they also have a large reserve in capital that we can deploy to make acquisitions. They have a very similar mindset on keeping the leverage ratio lower, so we are thoughtful about how we use debt — we all want to be able to sleep well at night without thinking that we are overleveraged — and they’ve put together some great lending partners for us. But the mindset of inorganic growth and organic growth, which has been a passion of ours, is also part of the mindset of Aquiline.
Q: What will be your acquisition strategy?
A: We have an awful lot of the country where we are not present, and we are looking to fill in that gap. We are really looking for platform-size acquisitions — something that’s $10 million revenue and above — and we can do secondary tuck-in acquisitions around them. We’ll do two to three of those a year.
Q: Would you look to do anything larger?
A: Absolutely. We’d love to find something that is transformative. For us, that would be something that’s $40 million and up, and we think if we can find the right partners, we’d absolutely love to do something that’s transformative and do it in the next 12 to 24 months.
Q: Are there any particular sectors you are looking at — geographic or product line?
A: Either. The sheer scale would be transformative because we are about $110 million, but specialty business and niches are of strong interest to us and is an area we’ve focused intently on the M&A side, but also geographic areas that we have a strong desire to get into. For example, the upper Midwest, the Mountain region, the Northwest, are all areas where we have a strong desire to find platform-sized acquisitions.
Q: How do you find good deals in such a competitive market for brokerage acquisitions?
A: We say it again and again, but I think it’s a matter of culture. We have a strong belief that if it’s a bad cultural fit, you can’t acquire something cheap enough and you can’t sell it high enough to make it work. So we look at the cultural fit first. We want people who we want to be in business with us as partners in the truest sense of the word, then we start pulling down the numbers. If we can find the right cultural fit, typically we can work out the numbers. It is a very aggressive market. There are 40-plus private equity-backed buyers active in the market right now, in addition to the publicly backed buyers, which are numerous, and also small, privately owned firms looking for tuck-ins, and we have competition with them as well.
Q: What are you looking at in terms of volume of transactions?
A: This year, we’ll complete seven to 10. I think we’ll probably be closer to 10 than seven. Next year it will probably be 12 to 15, and that will probably be our pace. We are not the type of buyer that is going to try to do 50 to 100 a year. That’s just not us, because I don’t think that you can achieve the kind of organic growth levels that we’ve targeted if you are distracted by doing that many acquisitions, and I don’t think the sellers will have the same quality of experience being integrated and the value of the greater firm if you are trying to do 50-plus deals a year.
Q: What are you looking to achieve in terms of growth?
A: 8% organic growth. That’s a high target, but it’s a target that we are absolutely dedicated to achieve.
Q: How will you achieve that?
A: We have retention levels in the 92%-94% range, so that’s step one. We are also looking to expand our production workforce.
Q: How do you view market trends, and how will that affect your strategy?
A: Rates are definitely trending up, everywhere outside of California comp, where we have large presence. We are starting to see some turn in that market, but I don’t expect it to fully turn until probably 2021. We are starting to see some of the combined ratios go up, and I think there’s some slow reporting of those combined ratios, as well. So I think they are higher than what’s currently being reported, but we expect another rate decrease from the state next year, and we’ll see whether the markets follow suit. But we are seeing rate increases in transportation, trucking, personal lines home insurance, auto, across the board. It’s really a much harder market in all those areas.
Q: How about wildfire exposures?
A: We have a number of commercial and private clients that are really experiencing some difficulty with rate increases and finding markets that are interested in insuring that exposure right now. It’s been a difficult renewal season for our clients and our team. We are having to get creative and expanding, such as looking at the excess and surplus lines market place, and trying to find other opportunities. It’s taking a lot more work to try and get clients a good result.
