Benefits mergers on the increase

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Benefits brokers and agents—facing increasing demands from employers and declining commissions—are merging at an

In less than two years, 10 Indiana firms have been swallowed up. The trend started slowly in 2007 but picked up speed late
in 2008 and has continued into 2009.

In March alone, Indianapolis brokers Benefit Associates Inc. and Benefit Consultants Inc. announced merger talks and Noblesville-based
One Source Insurance Inc. sold itself to Florida-based Brown & Brown Insurance.

Brown & Brown and Illinois-based Arthur J. Gallagher & Co. have led the recent shopping spree—and both say they
aren’t done.

"As long as we can find good people, we’re going to find a way to make it work," said Eric Anderson, executive vice
for Brown & Brown, overseeing Indiana and Kentucky.

The worsening economy has pinched brokers because their commissions are based on how many people their clients employ. With
job cuts mounting, Anderson said, more brokers have been willing to sell.

"I think they feel like, ‘I’m going to have to work as hard and make less money,’" he said.

Anderson said he would have another acquisition to announce April 1. Brown & Brown already has acquired five Indiana companies
since January 2008, boosting its staff to 80 and more than tripling its amount of premiums written each year to nearly $850

That growth would vault Brown & Brown from No. 8 on IBJ‘s list of largest insurance
agencies and brokerages to No. 1.

Such size gives firms like Zionsville-based Agency Associates Inc., which sold to Brown & Brown in November, more leverage
when negotiating with insurance companies, said the local agency’s founder, Ron Smith.

"Competition has made us seek somebody that will give us butt weight, but also the resources to develop the technology
we need to develop to stay competitive," Smith said.

Brokers need to grow larger to have negotiating power with insurance carriers, who also are consolidating, he said. In the
last two years, for example, Anthem Blue Cross and Blue Shield absorbed most of M-Plan Inc.’s customers.

But size also matters more now to meet employers’ demands. Not merely do they want brokers to shop for the cheapest insurance
plan, but they also want help getting their employees to improve their health and economize their use of health care. Employers
also want Web tools to make health plan enrollment and wellness efforts easier.

The entrepreneurs at the heart of most benefits brokerages have to come up with the necessary cash for those investments or
they turn to a large organization with more resources.

Last year, Jess Stump, the founder of EBS Insurance Group, figured it would cost him $250,000 to add new information technology
systems and staff. Instead, he agreed to sell to A.J. Gallagher, which has acquired three firms in the last 18 months.

Dane Hudson, area president for Gallagher, said he wants to make three more acquisitions this year. Hudson sold his own firm,
Carmel-based Strategic Health Benefits, to Gallagher in August 2007.

Trying to meet employers’ demands is the driving force in the merger talks between Benefit Associates and Benefit Consultants,
owners of both firms said.

"As our clients’ staff get pushed, they are asking us to step in and either assist or find resources for them, particularly
at open enrollment," said Linda Stuart, vice president and co-owner of Benefit Consultants. "To differentiate ourselves
the schlunks out there, we step in there and say, ‘We can help you with this.’"

Another factor for the talks is that Benefit Consultants President Russ Stuart, at age 62, would like to have a succession
plan in place. Benefit Associates CEO Bryan Brenner is 35.

"They need succession. We need to have capacity to grow and spread our customer needs over more people to take care of
work," Brenner said. The firms plan to make a merger decision around June 30.

If combined, the firms would have 37 employees and $288 million in annual premiums written. That would rank No. 8 on IBJ‘s
list of largest insurance agents and brokers.

Whether this round of mergers actually does serve employers’ needs better is still an open question, according to one broker
who says he’s committed to staying independent.

John Gause, president of Apex Benefits Group Inc., said he expects the mergers to cause employers to re-evaluate their relationships
with brokers—which provides his firm an opening.

"We see that as an opportunity," Gause said.

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