Benefit experts agree more mergers are on the horizon: Who’s next?

The merger of Willis and Towers Watson is likely just one of many to come in the next few years, as the Affordable Care Act and other factors continue to change the landscape of the business of health care, industry experts agree.

These large merger and acquisition deals, explains Mike Sullivan, executive vice president and chief marketing officer at Digital Insurance in Atlanta, “whether among carriers or intermediaries, are not just about creating greater scales of operations, but addressing market segmentation issues that create better prospects for downstream growth.”

“The ACA is changing the math of both insurers and advisers,” he adds. “Serving clients of all sizes, whether insured or self-funded, employer or consumer based, large or small, it is essential to have a broad-based platform that can reach the buyer where they live.”

It is part of the “significant consolidation” in the broker distribution network over the last 15 years, adds Jack Kwicien, managing partner of Baltimore-based Daymark Advisors and a member of the EBA Advisory Board.

Typically, larger firms acquire mid-market size brokers due to several factors, Kwicien says, including:

• The aging of the ‘boomer’ owners of firms;
• the lack of a formalized business continuation plan;
• market changes;
• compensation compression;
• eroding margins;
• the lack of organic growth;
• governmental regulation and compliance complexities; and
• escalating client expectations for even more “free value-added” services.

With the Willis and Towers Watson deal announced June 30, “we can infer that strategic fit, business synergies, potential operational efficiencies, the lack of organic growth, and profit margin pressures were likely key drivers that led to the transaction being consummated,” he explains. “There is simply too much capacity at all levels in the insurance industry sector at-large.”

Also see BeAdvised: Willis and Towers Watson are playing offense

“We likely will see other significant firms, brokers, carriers, consultancies, and TPA’s proceeding down a similar path regardless of the primary product focus of the enterprise,” Kwicien adds. “We can expect that group health, ancillary group products, voluntary benefits, property & casualty, retirement plan, and a number of individual financial product offerings will not be immune and will likely experience some consolidation over the next 2-4 years.”

John McKlveen, vice president of corporate development at Businessolver in Des Moines, Iowa, agrees. It is likely there will be additional M&A activity in the carrier, broker and supporting technology sectors going forward, he says.

“The uncertainty of the ACA has been lifted to some extent, and carriers in particular are looking for ways to further diversify their product offerings and leverage their increasing size,” he explains. “The recent acquisitions of smaller technology-focused companies by carriers and brokers provides evidence of the importance of speed to market for these large, established enterprises.”

Digital Insurance’s Sullivan believes further consolidation will take place within the insurer market.  “My sense on the health carrier side is that UHC will respond in some way,” he says. “If both the Anthem and Aetna deals happen, it would seem to give a green light to ‘Blue’ plans around the country to open up new discussions about strategic alignment.”

He also points to new entrants to the market, such as Zenefits, as likely to acquire companies, “to bolster their current deficiencies as benefit advisers.”

“The industry will continue to consolidate both at the local and regional level but also some of the big private equity backed players will be open to some type of additional consolidation,” agrees Mark Smith, founder and CEO of MiEdge. “Hub, USI, Alliant, Assured partners and Acrisure could be targets for an Aon. It is not inconceivable that one or more of the private equity backed firms could consolidate with each other. This would be fraught with integration risk but don't rule it out. Wells Fargo and BB&T and other large bank owned properties are also potential targets.  Lockton is the only non-public non-private equity in the top 10 and I don't see them doing anything other than what they have been doing.”

The consolidation will also “trigger new money that will try and vie for the disruption that is caused by mergers and acquisitions,” Smith adds. “I do not see Zenefits being impacted either way, their average account size is $2k in commissions which is not in the target market segment for any of the above mentioned firms. Also Zenefits’ model is to take out the broker so buying a broker makes no sense and probably a poor use of their capital.

In the end, the ACA is “a catalyst for change in our industry,” Sullivan says. “Size matters when it comes to being able to invest, evolve, compete and grow.”