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Thursday, Mar 28, 2024

Wave of Consolidation Shrinks Insurance Sector

Despite federal courts recently blocking a couple billion-dollar mergers, the consolidation of the insurance industry continues on a massive scale on both the carrier and brokerage sides. Last year, the Valley’s own insurer Health Net Inc. of Woodland Hills was acquired by St. Louis-based Centene Corp. for $6 billion, further reducing competition in the insurance marketplace. The mega-insurer marketplace would have shrunk even further except that courts blocked the $54 billion megamerger of Anthem Inc. and Cigna Corp. as well as the $37 billion Aetna Inc.-Humana Inc. deal. “When I started in business, there were about 50 companies that offered health insurance in the California marketplace,” said Jim Garrison, president of Glendale brokerage firm Pacific Federal. “Today, I believe there are five or six. If you take those two mergers (Anthem/Cigna and Aetna/Humana) and remove Kaiser (Permanente Inc.), you would be down to three or four (insurers) in California.” Pacific Federal, number 11 on the Business Journal’s Insurance Brokerage Firms list ranked by 2016 Valley-area revenue (see page 12), announced last month that the company had been acquired by Zenith American Solutions Inc. of Tampa, Fla. for an undisclosed amount. Both employee benefits firms specialize in providing coverage for union employees but in different geographic regions. “They solicited us, because they wanted to increase their business in Los Angeles, where they had a very small presence before they acquired Pacific Federal,” Garrison added. Retaining its name, Pacific Federal is now a wholly owned subsidiary of Zenith. It will remain in its Glendale headquarters, and no employees will be laid off at this time, said Garrison, who will continue as president of Pacific Federal. The top company on the Business Journal’s list is Itasca, Ill.-based Arthur J. Gallagher & Co., which has local offices in Glendale and Woodland Hills. The international insurance brokerage reported $236 million in revenue last year in the Valley region alone. Recently, Gallagher has made a flurry of acquisitions, including 10 since the beginning of 2017. Its most recent purchase, announced at the end of last month, was Ace IRM Insurance Brokerage Group of Australia for an undisclosed amount. In California, the firm acquired Lewis & Associates Insurance Brokers of Visalia, which will continue to operate from its current location under Gallagher & Co.’s direction. It appears all of the company’s 2017 deals are structured in this fashion, keeping logistics in place but with parent-company oversight. In the brokerage’s latest financial report, Chief Executive J. Patrick Gallagher Jr. commented on the consolidation strategy. “We are well positioned for 2017,” he said. “Our unique Gallagher culture is as strong as ever; our integration efforts are largely complete and we have a robust M&A pipeline. We continue to see an environment where our talented production and claims staff can drive growth.” Pacific Federal’s Garrison said brokerage firms have two options to spur growth – organic growth and growth through acquisition. Today the latter is more appealing, he added, as acquirers can secure interest rates as low as 2 to 3 percent. Number 18 on the list is Montage Insurance Solutions of Woodland Hills, bringing in nearly $49 million in the Valley area in 2016. The full-service brokerage firm, which represents over 100 carriers, has approximately 110 employer-clients and more than 100,000 members. “Being a mid-size brokerage firm, we get calls weekly from the larger broker houses asking to purchase our business,” Chief Executive Danone Simpson said. However, the television actress turned business owner said she isn’t concerned with the offers as she already has a succession plan in place. She is looking more toward the future and the proposed Affordable Care Act repeal bill recently introduced in Congress. “I’m hoping to see better (health insurance) plans with more competition, because carriers won’t have as many compliance fines and fees to account for,” she added. Part of the bill includes stripping away many of the taxes and fees associated with the Affordable Care Act, hopefully resulting in cheaper insurance for consumers. But as the insurance industry continues to consolidate, higher prices may still be on the horizon. “Fewer carriers mean less competition and less negotiating power,” Simpson said. “Brokers are the reason for the competitive marketplace, because we go to each (insurance) carrier every year to check pricings for our clients.”

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