Insurance Brokers (MMC, AON, AJG, WTW, BRO)

[tnathan]

Does anyone have some good reading on the dynamics in the insurance brokerage industry? What differentiates these stocks? Over the past bunch of months we have seen relative underperformance from BRO vs. all the other major brokers. Why would this be?

[gfp]

Hopefully dealraker will chime in but I just wanted to say the thread title would probably make an excellent ETF.

[Spekulatius]

BRP belongs in this basket too. It's an aggressive rollup.

[CorpRaider]

$GSHD?

[dealraker]

1 hour ago, gfp said:

Hopefully dealraker will chime in but I just wanted to say the thread title would probably make an excellent ETF.

gfp I follow Wells Fargo on the brokers because they do a good job covering them in my view  --- for a long time now.  Their view for several years now is that AJ Gallagher is both likely the better perfoming business and stock.  I'll try to gain access to some Wells (I just looked and couldn't find their last summary) stuff and pass it along.

 

Brown, I think, bought some UK brokers and had nice revenue growth but expenses were far higher than expected and I think that's was the stock price problem.   But again not certain but I think I read that at the time.  I once was asked by my bro-in-law to "manage" some of his money.  I just put 100% of it in Brown and Brown (it was Poe and Brown then) because the stock was selling at 12 times free cash flow and growing earnings at 15% a year.  Oh my...wish those days would return!

 

Wells follows:

AJ Gallagher

Aon

Marsh McLennan

Brown and Brown

Willis Towers Watson

BRP

Ryan Specialty

Goosehead

 

I've owned Gallagher for 28 years and Aon, Marsh, Willis (the predecessor got me there), and Brown for 25 years.

Just bought BRP when the price plummeted for some reason down around $15.  Other than what Wells reports I know nothing about them.

I know nothing about Goosehead except the stock price which is fascinating.

 

For your humor BB&T, now Truist, has a insurance broker sub best known for paying dearly for acquisions.

There are still many large private insurance brokers including the one Prem and Fairfax once owned 40% of called Hub International.  I'll never forgive Prem for selling this business (being seriously silly saying this) as I'll bet its performance since he sold it (and I had to give up my shares) has easily been 18% annual returns.  DAMN!  But Hub was constantly selling for less than ten times earnings back then when Fairfax owned so much of it....all while growing 15% a year.  The "old" days were fine wine.  

 

I'll look for the Wells stuff and post some things when I can find them.  

[dealraker]

20 hours ago, gfp said:

Hopefully dealraker will chime in but I just wanted to say the thread title would probably make an excellent ETF.

I'll post the new Wells insurance broker updates when it becomes available as I can't find and access the last report.

 

The thing that sort of stands out is that entities like Morninstar continuously rate all the insurance brokers as over-valued, significantly so.  This is while Wells states otherwise.  For decades now Wells has been correct.

 

I'll update later.  

[tnathan]

Thanks for the insight everyone...looking forward to the Wells update @dealraker. I did a bit more reading on Goosehead and it does seem like they have a very interesting / differentiated model with a potential for 10+ years of strong growth runway. What is the general bear thesis (apart from valuation)?

[dealraker]

1 hour ago, tnathan said:

Thanks for the insight everyone...looking forward to the Wells update @dealraker. I did a bit more reading on Goosehead and it does seem like they have a very interesting / differentiated model with a potential for 10+ years of strong growth runway. What is the general bear thesis (apart from valuation)?

tnathan I'm not aware of any thesis on Goosehead but I'll post any I see.  I think Wells was covering them and will follow up when I can.

[Spekulatius]

There is a VIC writeup from 2019 when it traded at current prices. The stock is cheaper know since the business has been growing. it seems to me that GSHD is more like  franchise business.

https://www.valueinvestorsclub.com/idea/GOOSEHEAD_INSURANCE/2028354943

 

I don't own it, but it does look attractive to me.

[dealraker]

49 minutes ago, Spekulatius said:

There is a VIC writeup from 2019 when it traded at current prices. The stock is cheaper know since the business has been growing. it seems to me that GSHD is more like  franchise business.

https://www.valueinvestorsclub.com/idea/GOOSEHEAD_INSURANCE/2028354943

 

I don't own it, but it does look attractive to me.

Thanks Spek...I actually think I've read that presentation before.

 

There's another odd player called Ryan Specialty, RYAN.  As of yet I've not investigated that business.

 

I have owned Erie Indemnity for some time now, many years.  What a business model!   Very different.  ERIE.  Valuation?  I don't get there, but others obviously do.  

[gfp]

I don't follow RYAN specialty, but noticed the CEO there, Mr. Ryan, definitely bought the dip recently -

http://openinsider.com/search?q=ryan

[dealraker]

Here's a typical first page of a recent Wells report on AJG and they've raise the "target price" to $215.  For the record...now for about 20 years I've thought Wells was crazy over-the-top on broker valuations.  Turns out ole dealraker was the damn crazy one...didn't know what I've owned for nearly 30 years.  Will it continue...LOL?   Who the hell knows?

 

Arthur J. Gallagher & Co. (AJG)
AJG: Best Broker Outlook; Q3 EPS and Conference Call Roundup
Our Call
Summary: AJG reported Q3 EPS of $1.72 beating both our estimate of $1.63 and 
consensus of $1.66. The beat was driven by better results in Brokerage, beating us by 
$0.04 on lower expenses (the level of margin deterioration was in-line with expectations 
but AJG restates its prior year margins for FX), and Corporate beating by $0.04 due 
to a favorable tax item and FX remeasurement gain. FX offset results by $0.02, just 
below our $0.03. Our 2022, 2023, and 2024 EPS estimates are now $7.77, $9.05 and 
$10.45 (from $7.66, $9.00 and $10.40). Our new estimates primarily reflect the Q3 beat 
and higher organic revenue growth. Our price target is now $215 (from $212) based 
on a 23x multiple of our 2023 EPS estimate and $4.50 per share to its clean energy 
investments. The shares should get a lift from the quarter, reflective of the company 
raising its Brokerage outlook for 2023 (to 7-9% organic growth from the prior 6-9%). We 
reaffirm our Overweight rating.
• Organic outlook better for 2023, with the Q3 in-line. In brokerage, AJG reported 
7.8% organic growth, in-line with our estimate and the "pushing 8%" that AJG guided 
to at its September investor meetings. Given the weaker results at BRO, we expect 
the in-line organic quarter and higher forward guide will be well-received. AJG lost 
$465,000 of contingents from Hurricane Ian as compared to $19 million for BRO 
(BRO also expects to not see the $19 million of revenue in 2023). Most impressively, 
Gallagher is now looking for 7-9% organic growth in 2023 (up from its prior 6-9%) and 
agreed with us that if the market really hardens they could potentially see double-digit 
organic growth (about 80% of their Brokerage business is commission based).
• Strong growth in all regions. Gallagher saw 9% growth in its U.S. retail business, 15% 
in the U.K., 9% in Australia/New Zealand and 13% in Canada up 13%, while Benefits 
was up around 3% (excluding timing), and wholesale was +9%. AJG is now looking 
for over 9% organic growth in Brokerage for the full year (unchanged from its prior 
outlook), with over 9% growth in the Q4 (unchanged from the previous guide). In 
Risk Management, AJG reported +12% organic, better than our 10.0% estimate and 
guidance for 10%. AJG expects Risk Management organic to be about 10% in Q4 and 
at least in the high-single digits in 2023.
• Margins in line with expectations, with improvement in 2023. Within brokerage, 
AJG saw margins contract 120 bps, in line with its guide for 125 bps of contraction. 
Within reinsurance, revenue came in at $120 million, in-line with expectations and 
Gallagher said the business performing well and generated 8% organic growth in the 
quarter (above 7% in Q2 and in-line with the Q1). Risk Management EBITDAC margin 
was 18.2%, close to its 18-18.5% guide (which was impacted by a new client ramp-up) 
and Gallagher is looking for a 19% margin in 2023. Within Brokerage AJG said that at 
6% organic they should see 50 basis points of margin expansion and pointed to the 
potential incremental margin from higher fiduciary investment income as coming on 
top of that.
• Robust M&A pipeline. Gallagher has more than 50 term sheets with nearly $400 
million of revenue, unchanged from its September investor meeting. Further, they 
reiterated that they think they will have more than $4 billion of cash to use for M&A 
through 2023 without issuing stock and did say that if deals do not materialize they 
could end up buying back their shares. Our sense is they will wait to see how the 
pipeline develops as higher interest rates could potentially cause PE interest in the 
group to wane.
Equity Analyst(s)
Elyse Greenspan, CFA
Equity Analyst | Wells Fargo Securities, LLC
Matthew Byrnes, CFA
Associate Equity Analyst | Wells Fargo Securities, LLC
Wesley Carmichael, CFA
Associate Equity Analyst | Wells Fargo Securities, LLC
Hristian Getsov
Associate Equity Analyst | Wells Fargo Securities, LLC

Edited December 7, 2022 by dealraker

[Dinar]

@dealraker, any chance that you could ask Wells Fargo analysts where they see numbers say a decade from now?  Or forecasts of organic revenue growth for the next 5-10 years + what if any acquisitions?  I know it is a tall ask, thank you.

[Spekulatius]

7 hours ago, Spekulatius said:

There is a VIC writeup from 2019 when it traded at current prices. The stock is cheaper know since the business has been growing. it seems to me that GSHD is more like  franchise business.

https://www.valueinvestorsclub.com/idea/GOOSEHEAD_INSURANCE/2028354943

 

I don't own it, but it does look attractive to me.

Hmmm:

https://valueinvestorsclub.com/idea/GOOSEHEAD_INSURANCE/2028354943#messages

 

The 50:50 split for recurring business sounds egregious to me too, why would anyone agree to this as a franchisee?

 

Edited December 8, 2022 by Spekulatius

[dealraker]

59 minutes ago, Spekulatius said:

Hmmm:

https://valueinvestorsclub.com/idea/GOOSEHEAD_INSURANCE/2028354943#messages

 

The 50:50 split for recurring business sounds egregious to me too, why would anyone agree to this as a franchisee?

 

Wow!   Not even close to anything I have come across before.  Looks like a temporary business model geared to send money up the food chain.

Edited December 8, 2022 by dealraker

[gfp]

Not sure where to post this, but some might find this second issue of industry magazine "E&S Insurer" to have some interesting commentary.  As dealraker pointed out, it reads a bit like a tabloid, much like its sister publication "insurance insider."  It is also primarily written out of the UK I believe.  But there are interviews and renewal scuttlebutt, etc.  Only the first two issues are free, it will be paywalled after this one -

 

https://pdf.static.prod.wbm.infomaker.io/NByENF43Hs4HyauotoWgX6hsNGI.pdf

 

(link is a PDF file)

 

Edited December 12, 2022 by gfp

[Xerxes]

On 12/6/2022 at 2:27 PM, dealraker said:

I once was asked by my bro-in-law to "manage" some of his money.  I just put 100% of it in Brown and Brown (it was Poe and Brown then) because the stock was selling at 12 times free cash flow and growing earnings at 15% a year. 

that is hilarious!!

[Spekulatius]

On 12/7/2022 at 10:04 PM, dealraker said:

Wow!   Not even close to anything I have come across before.  Looks like a temporary business model geared to send money up the food chain.

To be sure, I am not sure which way GSHD goes - MLM marketing scheme or legit insurance franchise / operator or something in between.

 

1) GSHD has seen strong growth in recurring revenues recently

2) I don't understand how a 50/50 split works for a franchise. it seems very high to me, comparable what a real estate agent can get when he works with a franchise like Coldwell bankers etc. However in that case the real estate will do the complete back office, pay of the office space, some of the branding advertisement etc. that's way more than what GSHD seems to be doing for their franchisees (some call center and some software / connections with insurance cos ).

 

I could be wrong, I have neither experience in insurance nor with real estate agencies. However, I have talked with my real estate agent about how this works (she ended up going alone later).

[dealraker]

2 hours ago, gfp said:

Not sure where to post this, but some might find this second issue of industry magazine "E&S Insurer" to have some interesting commentary.  As dealraker pointed out, it reads a bit like a tabloid, much like its sister publication "insurance insider."  It is also primarily written out of the UK I believe.  But there are interviews and renewal scuttlebutt, etc.  Only the first two issues are free, it will be paywalled after this one -

 

https://pdf.static.prod.wbm.infomaker.io/NByENF43Hs4HyauotoWgX6hsNGI.pdf

 

(link is a PDF file)

 

While it does read like a tabloid it is an excellent introduction to parts of the insurance business.  I enjoyed reading it.  Again, something that many don't accept and I get crap all the time about criticisms: You don't have to be giddy uphoric about everything management's do nor do you have to be "all in" or "all out" on something written...like this.  It has some really good stuff in it- makes things simple which is too simple yet still helpful.  

[dealraker]

On 12/12/2022 at 10:56 AM, Xerxes said:

that is hilarious!!

It was a small amount of his money.  I'd forgotten about it actually until a month or so ago Brown fell 11% in one day.  He calls me and says, "Damn boy....you screwed me...."

 

We laughed...he has about 20 times his investment.  Like Prem's Hub back in the old days, particularly in the mid to late 1990's and even in the Elliott Spitzer days (he attacked the brokers' contingent commissions), the brokers were growing 15% and often selling for less than 10 times free cash flow.  Except for my bro-in-law I never succeeded in persuading anyone in the publicly traded stocks investment arena to buy an insurance broker.  

Edited December 13, 2022 by dealraker

[Dinar]

@dealraker, any view on wr berkeley?  thank you

[dealraker]

40 minutes ago, Dinar said:

@dealraker, any view on wr berkeley?  thank you

Dinar I really don't follow WR Berkeley any longer but still own the stock.

[dealraker]

Some Wells from today as promised (as I cut and paste pieces relevant):

 

Insurance Brokers: the year of the reinsurance broker. We believe a big differentiator 
for insurance brokers will be their presence in the reinsurance market as that is where 
we expect the strongest rate increases next year. As reinsurance rates rise at 1/1, this 
should lead to outsized growth at reinsurance brokers, of which AON, AJG and MMC 
are the market leaders. RYAN could also benefit from its presence in the E&S market 
as property rates harden post Hurricane Ian.

[dealraker]

Further

 

Insurance Brokers — Business Mix Should Be A Focal Point In 2023
Business mix will matter more than ever. In our view, the focus on insurance brokers will remain 
organic growth and margin expansion, and we feel that key determinants in 2023 will be business mix, 
especially to the high-margin, high-growth reinsurance brokerage segment, as well as companies' 
ability to benefit from higher levels of fiduciary income. Our top picks in the sector are AJG and MMC.
• AJG has guided to 2023 Brokerage organic growth in the 7-9% range (versus the above 9% they 
are expecting this year), which we expect should be bolstered by the company's presence in the 
reinsurance brokerage business (AJG has typically guided conservatively and been able to beat the 
guidance that they have laid out). AJG should be able to bolster its organic growth with continued 
bolt-on acquisitions and grow its EBITDA. The company should also be able to continue to finance 
acquisitions as they have ~$4 billion of capacity for transactions.
• MMC should also continue to post mid-to-high single-digit organic growth aided by their 
reinsurance brokerage business (MMC is the second-largest reinsurance broker). MMC should 
also receive the largest benefit from fiduciary income among our coverage companies. As such, 
we expect the company to expand margins at a pace that is in-line or above peers in 2023. 
Additionally, MMC has ample capital flexibility, and we expect the company to return a sizable 
amount to shareholders in 2023 (we are forecasting capital return at ~4% of its market cap next 
year).
• RYAN should post double-digit organic revenue growth while maintaining margins above 30%. 
While the company screens high on an EV/EBITDA basis, we believe that is reflective of the high 
organic growth and margins it is seeing. While the company is facing headwinds from lines such 
as public company D&O, it stands to benefit from exposure to the property market, which is 
multiples of its D&O book in size. The company also has ample cash on hand to complete strategic 
acquisitions. The stock pulled back meaningfully after Q3 earnings due to a guide down in Q4 
organic as well as management commentary around potential headwinds, but we feel this presents 
a buying opportunity, given the company's strong underlying fundamentals and its ability to 
participate in a hardening specialty lines market in 2023.

[dealraker]

Stock Rank Order
Exhibit 3 - Insurance Coverage: Stock Rank Order Summary

AJG Insurance Broker 7 5 Down Will see a meaningful expansion in geographic exposure from its acquisition of Willis Re, seeing strong organic revenue growth, and continuing to find good bolt-on acquisitions.

MMC Insurance Broker 9 6 Down In 2023 MMC should continue to benefit from the new employees they have hired, which should be additive to its organic revenue growth.
RYAN Insurance Broker 10 14 Up Upgraded to Overweight from Equal Weight. RYAN should show double-digit organic revenue growth, with margins coming in around 30%, and revenue being aided by a small amount of incremental M&A. 

BRP Insurance Broker 14 13 Down BRP is unique among the publically traded brokers by giving investor access to a smaller cap company that also happens to be outgrowing its insurance broker peers.

AON Insurance Broker 16 17 Up AON has a large account and global presence, and is seeing strong organic revenue growth, and continues to expand its margins. The company has also said that they could add to their leverage as they look to 
continue to return capital to shareholders.
BRO Insurance Broker 17 18 Up Given its lack of an expense management program, BRO could see margins contract more versus peers. BRO is also bringing on larger international deals, which should carry integration risk and greater exposure to 
FX.
WTW Insurance Broker 18 19 Up WTW's organic revenue growth is expected to continue to lag peers at least through the remainder of the years. We think the concerns surrounding its organic growth trajectory, outweigh the low valuation of the 
shares.