Empire of Insurance

HUB International Is Back In the Acquisitions Race; To Go Public Within 2 Years

Top 100 Agency Profile
IJ Top 100 Rank: 2
Agency Name: HUB International Limited
Main Office: Chicago
Year Founded: 1998
No. of employees: 4,510
Agency Principals: Martin P. Hughes, chairman/CEO; Richard Gulliver, president
2009 P/C Revenues: $496,000,000
2009 Other Than P/C Revenues: $161,000,000
2009 Total P/C Premiums Written: $4,309,982,110
% Commercial: 53%
% Benefits: 15%
% Personal: 22%
% Other: 10%
2010 Key Acquisitions: Risk Transfer Insurance; IRUS Corp.; Ehrman & Associates; Maple Leaf Insurance; Pollman’s Agency; Sinclair Cockburn Financial; McFadden Agency; Florida Federal Insurance Co.; Burnham + Co.; Obenchain Agency.

Across the modern corporate continent of HUB International Limited, the road from each provincial outpost leads to the governing central hub in Chicago, where campaigns of acquisition herald impressive growth, and bring into the fold a widening array of agencies, brokers and accounts.

For each merger and acquisition (M&A) venture in which HUB came, saw and conquered, the man surveying the field and appraising the potential treasure has been Chairman and CEO Martin P. “Marty” Hughes, who has grown the company from a Canada-based operation with $36 million in revenues to the second largest privately held property/casualty agency in the United States, with nearly $800 million in revenues for 2010.

Northern Exposure

Hughes took the helm in 1999, the year after 11 Canadian insurance brokerages merged to form the first incarnation of the company, known as the HUB Group.

Nearly 200 acquisitions later, HUB is a vast empire of insurance, with 20 regional hubs and a legion of savvy executives who keep a constant lookout for new acquisition opportunities.

In 1999 alone, the firm acquired 44 agencies. The Great Recession forced a pause in the aggressive strategy, but HUB is again thinking big — picking up the pace of acquisitions and planning to take the company public once again within the next two years.

“We shut down M&A pretty much in 2009, and we did it just because we really had a difficult time determining how the heck to price acquisitions,” says Hughes. “We knew that people’s businesses were shrinking, not expanding, and of course sellers don’t necessarily want to hear that you think their business is shrinking.

“A lot of sellers still had their heads back in 2006 and ’07, and the fact is those days are gone; and so there was some unrealistic pricing expectations that existed out there. I think reality has set in — people understand what the lay of the land is today, and so they’re more realistic about what the opportunity is. And then also, we think that the economy has bottomed out.”

Boldly HUB

HUB broadcasts its strategy of aggressive acquisitions in ways large and small. Even the capitalization of the company name is a clue. HUB is not an acronym, but an exclamation. Hughes likes the way it looks in all caps, a bold syllable, more verb than noun, stretching into sentences with expansive dimensions of font and pica.

The organizational structure, too, suggests a company on the march. Just as Julius Caesar divided Gaul into three parts, HUB International’s 20 hubs are broken up into three regions. Each region has its own president, as does each hub; and at every level prospecting for acquisitions is a key task.

“From an acquisition standpoint, we identify potential candidates and begin the process of discussing potential M&A type of opportunities with the agency principals or with intermediaries that represent them, but ultimately the final sign-off on any deal is made by the corporate home office team in Chicago,” says Marc Cohen, president and CEO of the Northeast hub.

“In a tough economic environment and prolonged soft insurance market, M&A is a productive way to grow revenues, and it keeps our people and our business stimulated,” Cohen says. “It’s a very important part of growing an agency.”

From HUB’s perspective, bios are as important as balance sheets when scouting for new acquisitions.

“When I’m looking at deals, we’re really first underwriting the people,” says Cohen. “We’re underwriting the principals of the agencies that we’re looking to acquire; we’re underwriting the agency themselves, their reputation, their integrity. [We’re asking:] ÔAre they people that we feel will fit into the culture that we’ve developed within the Northeast region? And how will they fit?’

“We look at many deals, and decide to actually pursue very few of the ones that we have an opportunity to move forward with. So I’d like to think we do a pretty good job of screening, understanding the principals of the agencies that we’re talking to, understanding why they want to go into a sale, understanding what their future plans are — do they wish to remain engaged in the business, are they looking to give up management responsibilities and become producers, are they looking to take a back seat to a succession plan within their office — all of these different items, and sometimes challenges, need to be looked at.”

With the title of chief sales officer, one might think that Larry Lineker would be concerned mostly with managing producers and promoting organic growth. But at HUB, M&A is not relegated to a box or two on the organizational chart. From his office in Chicago, Lineker plays a major role in seeking out new opportunities. “My team would be involved with [an] acquisition candidate from the first meeting stages with them all the way through to the close of the deal,” he says.

The Company Id

The chief sales officer is just one of many HUB executives who closely scrutinize potential targets. “We’re very, very determined and very thorough when we do acquisitions,” says Hughes. “We are incredibly anal when it comes to acquisitions, and it has served us very well; and it is what has distinguished us, I think, from everyone else. It’s why we have grown from the company we were when we started to where we are today. Nobody has done this as fast or as well as we have, and I think that’s because no one has really been as methodical about the acquisitions as we have been.”

There have been a few regrets, he concedes. “You can’t do 200 without making some mistakes, and there are a couple of those that I definitely would take back. [In each such case] we’ve done something about it. One thing we have been very good at — if we make a mistake we don’t try to sugarcoat it; we don’t try to work around it; we acknowledge it and we do something about it. We either consolidated the operations into another existing hub or we just sold it right back.”

Crossing the Rubicon With Talbot

According to Hughes, the biggest gamble was the $100 million Talbot Financial Corp. acquisition in 2004 from Safeco Corp. “That one was a big risk for us because back then we were only about $300 million in revenue ourselves, so we were kind of betting the ranch on that acquisition. But we knew [President] Roy Taylor, who was the key guy running the brokerage operation at Talbot. We had a lot of respect for him and we were confident that in our world they would perform at a much higher level than they did in the Safeco Insurance Co. world, and that in fact has turned out to be true.”

Since then, financing has been less of a worry for the revenue-rich company. “We do two kinds of acquisitions,” Hughes explains. “We do hub acquisitions, and the hub acquisitions are larger and more sophisticated operations. And when we do a hub acquisition, we make sure that there’s a substantial piece of equity included in the transaction, because we need to know that those people are on board, they have accepted our values, our vision and our goals; they’ve bought into them and that they’re in it for the long haul.

“For fold-ins, which are the vast majority of the acquisitions that we do, those get integrated into one of our existing hubs. For those we pay cash, and we generate enough cash internally to pay for those.”

HUB became a privately-held firm in June of 2007 after Hughes received what he describes as a “compelling offer” from funds advised by Apax Partners together with Morgan Stanley Principal Investments.

“We were trading at about $26 in December of ’06 and in late January or early February of ’07 they offered us $40, and that eventually sold for $41.50; so it was a huge premium over what we were trading at in the public marketplace.”

He believes the move has given HUB a substantial advantage: “Honestly, we’re delighted to be a private company right now because the public companies have all been clobbered.

“We will, however, in all probability go public again sometime in the next year or two,” he adds. “You know, private equity wants to get their money back out, and so that was the plan from day one. They saw a huge opportunity with us in terms of our model and our strategy and our growth goals, so that was the reason they were willing to pay such a big premium. And the plan for them to get their money back out is what you’ve got to have an exit strategy.

“So when you see that the insurance marketplace has stabilized, and rates have stopped going down like they have for the last seven years, you’ll probably see us go public shortly after.”

Et Tu, Brokers

The strategic emphasis on acquisitions leads some observers to wonder how organic growth fits into the corporate equation. M&A may expand the empire, but selling policies out in the provinces is what will keep the barbarians from the gate.

Hughes acknowledges that M&A “runs out of steam at some point” — a distant point. He and other HUB principals contend that they are not neglecting this aspect of revenue growth. They cite a commitment to developing expertise in particular niches, such as environmental and energy industries.

“We really focus hard on specialty verticals within each of the hubs,” says Lineker. These producers and HUB agencies “become known in their particular region or their particular segment of business as an expert in that, and we do see a significant increase in our sales execution when we are specializing in specific verticals. Those verticals always tend to perform better than what I would call our general business.”

Not surprisingly, the tactic of developing niche expertise dovetails with the overall strategic imperative of expanding corporate frontiers.

“At least a third of the acquisitions that we’ve done over the last five years [in the Northeastern region] have been of firms that have an expertise in a niche,” says Cohen. “We seem to gravitate towards agencies that have a specific expertise in an industry.” As examples, he cites an acquired agency that specializes in the pest control and the landscaping industry, another that serves elevator contractors, and one with a focus on the nursing home/assisted living business.

Marathon Men

For Hughes, another key to promoting organic growth is cultivating an entrepreneurial spirit within the company. Part of that is allowing the hubs and individual agencies flexibility in the field. In a brochure given to employees, Hughes promises: “At HUB, as long as you are abiding by our values and policies, you don’t have to wait for a corporate mandate to try something new. Never having tried is the sure way to fail.”

For that requisite to take hold, of course, the powerful central office needs to know when to back off. The rule laid down by Hughes is: “We centralize everything that doesn’t touch the client, but we leave everything that does on a local basis; because I think insurance is just like politics — it’s all local.”

Local flexibility and a strong central office influence are not mutually exclusive. In fact, the corporate presence is often very personal. Top executives spend weeks on the road visiting the hubs and their various agencies. Hughes estimates he spends 65 percent of his time traveling. “We’re definitely road warriors in this company,” says Lineker, who reports spending 100 days each year visiting the hubs.

Motion is a common HUB principle, and theme. “We have communicated to everybody we’re in a marathon,” says Hughes. “This is not a dash. We’re in a marathon and we have to think of it that way. We have to run very hard, but we have to run on a sustained pace, and we have to look at building a sustainable model that will be there for the long haul.”

The first marathon, of course, was a Greek, not Roman, invention. That epic run ended in Sparta, another culture with a fairly strong acquisition strategy.

Topics Agencies Property Casualty