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

[dwy000]

On 9/19/2023 at 9:08 AM, longterminvestor said:

BRP - T. Baldwin's words "BRP Alchemy, where one plus one ultimately enables something more than two" - lets dive in.  

 

- The C-Suite is OBSESSED with Adjusted EBITDA.  Almost odd how they are amazed with themselves on how good their numbers are.  You will catch them saying EBITDA a ton without the "adjusted" coming first which shows they are almost forgetting their numbers are filled with adjustments.  The use of metrics and formulas is almost like management knows investors screen the stock based on certain metrics and they do whatever they can to hit those metrics.  I am not saying the numbers are false, they are just adjusted like CRAZY.  

- To grow this fast, debt is the only way.  $1.331B of floating debt comes due in 2027.  Management got terms in kindest credit market in a generation.  Props to them for seizing the moment (better to be lucky than good), lets see how that plays out when they have to replace that debt.  

-Regarding the moment in time, its almost as if Baldwin saw this confluence of insurance brokerage becoming a fad and capitalized on cheap debt, huge investor interest in brokers, and pounced on the opportunity to do a public offering.  100% credit goes to him for seeing that opportunity, really well done, however it all inures to him and his cohorts benefit, not shareholders.  

-Everything in the C-Suite just looks cozy.  They even have a client as an investor in the operating LLC (The Villages - retirement community in central FL).  The owners of that co are all decedents of the original developers of the Villages (moms, brothers, daughters, ect).  Just weird to me.  Its all disclosed, just seems, well, cozy.  

- Dual class stock.  Buying a share of Class A BRP gets you a piece of the PubCo that has the operating LLC inside where the C-Suite holds all the marbles.  Class B Shares are what the Baldwins own, not you.  The structure is set up so Mr. Lowry Baldwin has ultimate say on the business and shareholders do not.  All the managers have signed an agreement to vote with L. Baldwin.  

- Tax Receivable Agreement (TRA).  Didn't know much about these however the structure exists for Up-C IPO's.  Other businesses with this structure are Shake Shack, Interactive Brokers, Goosehead Insurance and Rocket Mortgage.  The TRA gives any tax savings the business enjoys back to the founders at a split of 85%. In fact, there is a financial incentive for management to continue losing money because the future net operating loss carryforwards increase the payment into the TRA.  Did not do the math (mostly cause I would fail miserably at calculations) however its gotta be in the $100's of millions in future payments to founders through the TRA structure.    

- Any founder whose business is in a sector that trades on above the line EBITDA multiples with reckless abandon for net income LOVES the TRA because with adjustments, the future payments are not apart of the models analyst build.  When market trades the business on EBITDA (and in case of BRP, its "Adjusted EBITDA - never forget that), the TRA will not be accounted for and yet its a huge drag on profitability.  

- Wake up, BRP loses money on a GAAP basis.  Insurance Broker business model is SO GOOD that investor community ignores the fact that BRP has not made money on GAAP basis since inception.  This stems from the acquisitions and meteoric revenue growth.  Just find it difficult to put out to shareholder community words like "Continuing track record of exceptional operation and financial execution" when the financials are FILLED WITH ADJUSTMENTS.  Here's another one, "Investing to drive efficiencies and sustainable long-term profitable growth with a disciplined, return-focused capital allocation strategy".  That's just not accurate.  There has been no financial return in the business, all the money is going out, maybe in the return is in stock returns but not the operating business itself.  

-Acquisitions have not slowed, they have stopped.  Management knows they have to get balance sheet ready for what's coming.  I view that as a positive but if there is some big announcement on acquisition, look at the debt.  And with regards to acquisitions, BRP historically has OVERPAID for the business's they bought.  They are not disciplined with their poker chips, they just put them all on red and spin the wheel.  

-Interest Rate Cap Purchases.  All the debt is floating so they buy hedges at an expense to cap the interest rate hike risk.  This is just a scary thought again because these costs are not included in the "Adjusted EBITDA" numbers management touts from the roof tops however they are real expenses to the business.  

-Downplaying the rate environment (hard market) as a function the organic growth.  Cringeworthy to hear coming out of the CEO's mouth because if you are a broker in the US, a huge part of organic growth is coming from the increases in rate.  CEO just dodges questions because he wants investors to believe the organic is coming from the business, not from rate.  T. Baldwin quote from Investor Day Nov 2022, "if you look at the 28 percent organic growth, we delivered in the third quarter of this year, only 2.7 percent of that came from a combined tailwind of rate and exposure".  In this hard market, I find that almost impossible to believe.  Side note, to have the figure down to a fraction of a decimal is weird, it not an easy task to carve out the numbers on organic/exposure basis/rate with millions of policies and the way data is entered into systems - they could be doing something incredible there with tech and tracking - if so good for them and it is incredible - I do not have any insight - I am gonna ask around tho - just find that number difficult to understand how its calculated.  Meaning if there is so much noise that goes into agency management systems, it would take an entire team of people just focused on that problem every quarter to get that number accurate to a percentage decimal point - and then you have audits, endorsements, and return premiums - its just not a number I am comfortable seeing disclosed in that manner.  My point is management is drinking too much of their own Koolaide and need to wake up.  

-Investor Day slides mix in premium with revenue to almost make things look bigger than they are.  Never forget the words of total shark broker who told me, "We can not spend premium, we can only spend revenue" meaning don't talk about the big $100K premium you just bound, talk about the $10K in revenue that will go to payroll, rent and expenses - small time agencies talk about premium - pros talk rev.  

-Organic Growth is staggeringly high and management is adamant this will continue.  Lets see.   Will be tough to sift through the slide decks of the future with a huge amount of footnotes, *, and symbols next to organic growth numbers.  The way revenue is earned allows management to play with that, as long as its disclosed seems to be BRP's north star.

-Medicare unit is not a great business.  I believe its a top line money grab to boost revenue because management needs growth for metrics.  Medicare revenue is not worth the same as a middle market revenue yet there is no discount in the business for the Medicare rev.  Little deeper dive, one $100,000 revenue account ($1M premium) that has been on books for 5 yrs is worth a TON more than $100,000 in Medicare revenue.

-Early acquisitions were not 100% buy outs, they bought only portions of the business.  Not a fan of this in an "elevator asset" business where the largest asset being purchased can walk out the door.  Very different when buying a pipeline or manufacturing business where the assets are static and yeah, you need people to run the assets, but there's a bunch of invested capital that can not leave the business.  This is not true in brokerage, that is just bad capital allocation to me for the long haul however if you are trying to make a quick buck - sure does seem smart.  

- Dilution: 60,093,228 Class A shares outstanding as of June 30, 2023 vs 33,098,356 Class A Shares outstanding as of Sept 30, 2020.  OUCH!

-Founder Lowry Baldwin has a history of starting, selling, leaving and doing it again.  That is not the kind of founder I want to partner with when one sells the business, walks in the next day to tell their new found owner who wrote a huge check and say "when my non-compete is over, I am outa here".  Totally fine to do, live up to contractual obligations he did, however that takes a certain kind of person that I am not a fan of when there are other Chairmen/Chairwomen who want to paint a masterpiece and build forever.  

 

For those believers, here is some of the good:

- MGA of the Future is definitely the best business they own, followed by Middle Market, and then Personal Lines.  MGA of the Future is probably the gem inside this business. 

- The growth is mind numbing, it took Brown & Brown 70 years to get to $1B in revenue, BRP did it in 11years.

- Goosehead vs BRP personal Lines.  I believe the BRP personal lines business is larger in revenue that the entire Goosehead business.  So if you think Goosehead is properly priced (I do not), then BRP's personal lines business is undervalued inside BRP.  

 

Closing:

Just seems like founding family is running this business for the benefit of themselves and not shareholders.  Ultimately, Insurance Brokerage is such a GREAT business it is idiot proof.  Baldwins are not idiots, actually quite the contrary - they have gotten rich being smarter than everyone else and their timing is incredible.  Hats off to them!  If you were an early seller of your business to BRP and got units in the LLC, you did extremely well (and participated in the TRA) however shareholders from IPO on are just way behind the curve in terms of alignment. 

 

Here are their words taken from 10K (Holders being the Pre-IPO Members are "Holders): "Furthermore, Holders’ interests may not be fully aligned with yours, which could lead to actions that are not in your best interests. Because the Holders hold a majority of their economic interests in our business through BRP rather than through BRP Group, they may have conflicting interests with holders of shares of our Class A common stock."

Well it appears you're not a big fan!!!  While obviously I don't hold a candle to your knowledge of the business, I was surprised at the level of dislike your note seemed to imply.  I was curious however in some of the points you made on financial engineering:

.

- on add backs, other than stock based comp, all of the add backs seem to be the exact same ones that BRO uses (other than the lovely catch all "other" for BRP).  What are you seeing that's excessive or unusual?

 

- for the tax agreement, upon first read it appears to reflect only the actual cash savings at the consolidated parent they get solely because of the LLP structure, gets passes back 85% to the founders.  The 85% is excessive since the LLP member share is only about 42%.  But given the group is not a tax payer I don't think any amounts would have been paid to date.  When future tax are due it could be more inequitable

 

- I'm not sure the EBITDA metric would be affected by the tax agreement because it's a pre-tax metric.  It would impact cash flow when they become a tax payer down the road but I don't get how it impacts using EBITDA as a performance metric. 

 

- the interest rate caps may be pricey but it appears they've made over $22m in gains by owning them.  With the amount of debt they've got (all floating rate) it seems pretty prudent to hedge that.  This also wouldn't impact EBITDA since it's added back (or subtracted because it's gains) with interest expense.  

 

- on Lowry Baldwin walking away - the proxy shows him owning over 25m shares which is over $625m of value.  Other than the A share/B share confusion, he actually seems pretty aligned with shareholders.  

 

Your points on the cost of acquisitions being excessive and what proportion of organic revenue is actually just pricing, are both very valid and give me more reasons to pause.  Plus, the stock based comp is getting WAY out of hand.  Not to mention the amount of leverage and earnouts due over the next 9 months.  

[longterminvestor]

My next project is to figure out why AJG trades at higher PE than the other brokers.  Anyone have thoughts?  There is some chatter AJG has some interest in a coal deal that gives them some tax credits, I am going to research and share. 

 

Seems like a logical question with BRO trading at 28X, AON at 26X, WTW at 22X, MMC at 30X, and AJG at 45X - these are all extremely mature businesses and AJG sticks out.  Outlier would be a RYAN at 80X and GSHD at 300X - both new in the past 10 years.  Will look as well.  BRP doesn't have any earnings so it is not in this group.  

[dealraker]

1 hour ago, longterminvestor said:

My next project is to figure out why AJG trades at higher PE than the other brokers.  Anyone have thoughts?  There is some chatter AJG has some interest in a coal deal that gives them some tax credits, I am going to research and share. 

 

Seems like a logical question with BRO trading at 28X, AON at 26X, WTW at 22X, MMC at 30X, and AJG at 45X - these are all extremely mature businesses and AJG sticks out.  Outlier would be a RYAN at 80X and GSHD at 300X - both new in the past 10 years.  Will look as well.  BRP doesn't have any earnings so it is not in this group.  

Not sure what you are looking at for those PE's but I'll mention that AJG has elements/business that we haven't discussed here on COBF as of yet which makes it quite unique.  I'll defer any of my experiences or views on AJG or any of the brokers as I much prefer getting yours (longterminvestor and spek too) without any lead-in from me.  

Edited September 21, 2023 by dealraker

[Spekulatius]

Refinitv and tikr (which pulls consensus) has AJG at ~25x earnings. I think the 45x PE is backwards looking and may be GAAP not "operating earnings". I think AJG trades in-line with BRO, if not a bit cheaper. 

Edited September 21, 2023 by Spekulatius

[longterminvestor]

yes those are TTM PE's.  

 

 

[longterminvestor]

3 hours ago, dealraker said:

Not sure what you are looking at for those PE's but I'll mention that AJG has elements/business that we haven't discussed here on COBF as of yet which makes it quite unique.  I'll defer any of my experiences or views on AJG or any of the brokers as I much prefer getting yours (longterminvestor and spek too) without any lead-in from me.  

share your thoughts.  thats what this is all about - all trying to learn. 

 

"I'll show you mine if you show me yours?"  send it.  put it out in the ether.  

[dealraker]

1 hour ago, longterminvestor said:

share your thoughts.  thats what this is all about - all trying to learn. 

 

"I'll show you mine if you show me yours?"  send it.  put it out in the ether.  

AJG clean coal business and of course tax credits

[longterminvestor]

Come one.  I already mention the coal deal, give something new!!!  

[dealraker]

On 9/21/2023 at 5:40 PM, longterminvestor said:

Come one.  I already mention the coal deal, give something new!!!  

Once again longterminvestor, my age resonates and lack of awareness shows up.  In my earlier years I was hyper-aware, now I read all things multiple times if I'm trying not to embarrass myself.  I didn't know you'd mentioned it previously.  Sorry about that.

 

 

Edited September 23, 2023 by dealraker
spellin' ain't right

[longterminvestor]

Razzing you a tad.  You earned it.  Good for you sir! 

 

Will share some thoughts when I find some time.  Too busy selling insurance - new deal is getting railed with a $3.00 property rate with 10% wind deductible (market 3 years ago was $0.80 at 3%).  Crazy times.   

[sleepydragon]

Looking at Baupost's holdings. They actually are long WTW.

But Baupost's holdings can be tricky, sometimes they have a short leg in credit or some other stocks.

[dealraker]

23 minutes ago, sleepydragon said:

Looking at Baupost's holdings. They actually are long WTW.

But Baupost's holdings can be tricky, sometimes they have a short leg in credit or some other stocks.

The decades long record for the insurance brokers is pretty phenomenal and almost completely without hero money manager participation.  

[sleepydragon]

On 7/29/2023 at 11:23 PM, longterminvestor said:

First on Ryan, then Kinsale.  

 

This is what RYAN are building (see below - taken from Ryan's S1).  Actually pretty good for the thread on what the actual insurance distribution landscape looks like.  Efficient in some ways, others not so much, but insurance is just hard to put in a portal and spit out a quote - case in point look at Lemonade (LMND).

  

 

The chart shows how vital the retail facing insurance agent is to the distribution system.  Pat Ryan owns too much of AON so he couldn't be a retail facing agent, so he just took the wholesale segment by storm.  The underlined "bound" terminology is SUPER important.  When you as the MGA/MGU can bind, it means the insurance company has given you the underwriting authority.  In the trade, its called "the pen", meaning you can write it.  This is where the MGA/MGU does all the work and really the insurance company just sits back, manages the book, collects checks and pays claims.

 

Wholesale Brokerage is where a retailer needs help placing a portion of an account the admitted market wont write period or wont write competitively.  In my region, wholesale is a huge part of the business.  When ever people refer to the E&S market or Non-Admitted market, a wholesale broker is involved.  Pat Ryan put it best, E&S is freedom of rate and form.  Meaning carriers can charge whatever they want and throw down whatever coverage they want.  Versus the admitted market where the carriers have to sit in front of the insurance commissioner, get the coverage language approved and file the rates they want to charge for approval.  

 

EVERYONE that Ryan hires is like 25 and super Type A.  Young and aggressive.  You can call a random number at Ryan in a region you need to place a risk and get an immediate pick up or call back in like 2 hours.  Never fails, they dont know who you are but they are ready to talk about a deal.  Its pretty incredible.  I'm sure there are lots of folks who call back but it is seriously a culture thing at Ryan.  And the older folks who are there were bought in a acquisition.  I'm long RYAN and probably should have bought more.  I bought some more when it tanked after earnings a like 2 Quarters ago.  Pat Ryan was buying big chunks himself.  Which I loved.  The story of how Ryan got started is pretty awesome.  For another time.

 

KINSALE

2nd tier risk bearing insurance company who writes the stuff no one else wants to write.  They will quote things no one else will.  I have not looked at the business as investment, but we trade with them and they will turn things quickly.  Gonna be on the tougher classes of business for sure with some language that is favorable to them, not the insured.  Doesn't make them a bad market, this is just how companies grow up into bigger risk bearing companies.  Gotta get your start on stuff no one else will write.  There are worse insurance companies than Kinsale so they are not bad, they just are a carrier who doesn't have any polish.  Markel started this way, and actually Markel and Kinsale compete on business in my market.  

 

 

Wolfe recently started covering insurance, and their two picks are Ryan and Kinsale. 

But JPM has underperform on Ryan and think it has earning quality issue

 

[longterminvestor]

RYAN has the same Tax Receivable Agreement and dual class share structure as BRP.  Really wish that was not the case.  

[longterminvestor]

https://ir.cadencebank.com/2023-10-24-Cadence-Bank-Announces-Agreement-to-Sell-the-Insurance-Operations-of-Cadence-Insurance-to-Arthur-J-Gallagher-Co

 

https://investor.ajg.com/news/news-details/2023/Arthur-J.-Gallagher--Co.-Signs-Agreement-to-Acquire-Cadence-Insurance-Inc/default.aspx

 

$904M Cash for $167M revenue ($5.4X) or $62M EBITDAC (14.4X).  This 5.4X topline is the exact same multiple Carlyle paid for NSM (NSM lost money on a GAAP basis).  

 

That could be a nice unlock for regional banks who have to sell insurance brokerage arms for cash to get balance sheet in order due to bond valuations.  AJG basically trades at 5.4X topline so there is no value creation in acquisition when a business (AJG) turns $9B topline buying a business that turning $167M and the valuations are equal.  I haven't done super deep dive on this and just running some quick numbers.  Traditionally, the value unlock was big brokers buying smaller brokers for $0.50 and inside the bigger pie they are immediately worth $1.00.  Short summary, that spread has tightened dramatically as the hunt for acquisitions has intensified.  Has for a while actually, just more proof with this transaction.  

 

Interesting to match up the news releases from Cadence Bank and AJG.  AJG has a tax benefit that allows them to show the price at $749M (net $155M tax benefit) however Cadence is happy to report $904M cash 100%.  All in the eye of the beholder...

 

who would have thunk this kind of action in the sleepy insurance brokerage space.  

[Spekulatius]

On 10/26/2023 at 2:42 PM, longterminvestor said:

$904M Cash for $167M revenue ($5.4X) or $62M EBITDAC (14.4X).  This 5.4X topline is the exact same multiple Carlyle paid for NSM (NSM lost money on a GAAP basis).  

This is pretty rich. I think AJG mentioned in their IR decks a while ago that they pay 10-11x EBITDA but that is for much smaller acquisitions. I guess valuations keep creeping up.

Edited November 26, 2023 by Spekulatius

[dealraker]

On board for 29 years now...and now my largest holding almost 41%.  Wells does a commendable job with the brokers overall.

 

Insurance Brokers
Arthur J. Gallagher & Co. (AJG)
AJG: Another Consistent Print from Gallagher; Q3 EPS and Conference Call Roundup
Our Call
AJG reported Q3 EPS of $2.00 beating both our estimate of $1.92 and consensus of 
$1.96. The upside stemmed $0.04 from Brokerage, $0.01 from Risk Management, and 
$0.04 from Corporate. Within Brokerage Gallagher saw slightly better organic and margin.
Estimates and price target changes: Our 2023, 2024, and 2025 EPS estimates are 
now $8.80, $10.50, and $11.90, respectively (from $8.71, $10.30, and $11.70). Our 
estimates reflect slightly better organic growth and EBITDAC margins in Brokerage and 
Risk Management and stronger investment income. Our price target goes to $266 (from 
$261), using a 25.0x multiple on our cash EPS plus $3 per share for our clean coal DCF.
Stock call: Gallagher shares may not move much on earnings, even with the quarter 
coming in a bit above their expectations from their September investor day. Nonetheless, 
we still like the stock here. They continue to see strong organic growth (+9.3% in 
Brokerage in Q3, with growth expected to approach 9% for the FY and be in the range 
of 7-9% in 2024), they are expanding their margins, and see an active M&A pipeline. See 
inside for what AJG is saying on key issues.
The good: Brokerage organic growth of 9.3% came in a touch above the 9% expectation 
due to Reinsurance (+20%) and Global Specialty (+18%) coming in better-than-expected. 
Risk Management organic was 17.9% also above the 15-16% guide. Further, Gallagher 
reaffirmed its outlook for both businesses for FY 2023 with Brokerage growth expected 
to be ~9% and Risk Management above 15%. For 2024 Brokerage organic should be 7-9% 
with Risk Management at 9-11%. For organic growth by line, see Exhibit 2.
The bad: Supplemental and contingents were up 5% in the quarter as they had expected 
some softness due to the Maui fires, and they also saw an uptick in insurance carrier loss 
ratios. This was included within the overall 9.3% Brokerage organic growth though. The 
RPC slowed to 10% from 12% in the Q2, but this isn't necessarily totally bad as Gallagher 
did say that the numbers would be similar when adjusting for mix, and they are not seeing 
any meaningful shift in the market.
The ugly: There wasn't much to call "ugly", when all segments beat expectations and the 
company reaffirmed its outlook for 2023/2024.
Updated M&A pipeline: They continue to have a healthy pipeline with 45 terms sheets 
with $450 million of revenue (vs $700M in September) but this is after the Eastern Bank 
and Cadence deals. Given these deals and depending on timing of future deals Gallagher 
may issue equity (couple hundred million) to help finance some tuck-in deals before the 
end of the year.
Equity Analyst(s)
Elyse Greenspan, CFA
Equity Analyst | Wells Fargo Securities, LLC
Matthew Byrnes, CFA
Associate Equity Analyst | Wells Fargo Securities, LLC
Wes Carmichael, CFA
Equity Analyst | Wells Fargo Securities, LLC
Hristian Getsov
Associate Equity Analyst | Wells Fargo Securities, LLC
Rating Overweight
Ticker AJG
Price Target/Prior: $266.00/$261.00
Upside/(Downside) to Target 15.7%
Price (10/26/2023) $229.89
52 Week Range $174.43 - 237.95
Shares Outstanding 215,500,000
Market Cap (MM) $49,541
Enterprise Value (MM) $55,029
Average Daily Volume 1,220,473
Average Daily Value (MM) $281
Dividend (NTM) $2.04
Dividend Yield 0.9%
Net Debt (MM) - last reported $5,487
ROIC - Current year est. 18%
3 Yr EPS CAGR from current 
year (unless otherwise noted)
15%
$ 2022A 2023E 2023E 2024E 2024E
EPS Curr. Prior Curr. Prior
Q1 (Mar) 2.81 A 3.03 A NC 3.53 E 3.50E
Q2 (Jun) 1.69 A 1.90 A NC 2.35 E 2.29E
Q3 (Sep) 1.71 A 2.00 A 1.92E 2.40 E 2.35E
Q4 (Dec) 1.54 A 1.88 E 1.86E 2.22 E 2.17E
FY 7.74 A 8.80 E 8.71E 10.50 E 10.30E
P/E 29.7x 26.1x 21.9x
ROIC - Current year est.: Represents return on equity (ROE)EPS: 
Represents adjusted EPS
Source: Company Data, Wells Fargo Securities estimates, and Refinitiv.
NA = Not Available, Volatility = Historical trading volatility
All estimates/forecasts are as of 10/26/2023 unless otherwise stated. 10/26/2023 21:44:21EDT. Please see page 9 for rating definitions, important disclosures and required analyst 
certifications. Wells Fargo Securities, LLC does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of 
interest that could affect the objectivity of the report and investors should consider this report as only a single factor in making their investment decision.
Insurance Brokers Equity Research
Wells Fargo Express Takeaways
Arthur J. Gallagher & Co. (AJG) | Rating: Overweight | Price Target: $266.00
Analyst: Elyse Greenspan
Financials
FY (Dec) 2022A 2023E 2024E
$
ESTIMATES
EPS
Q1 2.81 A 3.03 A 3.53 E
Q2 1.69 A 1.90 A 2.35 E
Q3 1.71 A 2.00 A 2.40 E
Q4 1.54 A 1.88 E 2.22 E
AN 7.74 A 8.80 E 10.50 E
Rev. (MM) 8,513.9 A 10,065.2 E 11,630.6 E
FCF (MM) 1,942.7 A 771.0 E 2,341.0 E
EBIT (MM) 2,096.7 A 2,494.9 E 3,102.2 E
EBITDA (MM) 2.69B A 3.22B E 3.80B E
Organic Growth (%) 9.7% A 9.1% E 8.0% E
WELLS FARGO vs. CONSENSUS
Consensus Estimate -  8.76 E 9.95 E
Difference from Consensus 0.5%  5.6% 
VALUATION
P/E 29.7x 26.1x 21.9x
EV/Revenue 6.5x 5.5x 4.7x
EV/FCF 28.3x 71.4x 23.5x
FCF Yield 4.7% 1.9% 5.7%
EV/EBIT 26.2x 22.1x 17.7x
EV/EBITDA 20.4x 17.1x 14.5x
EPS: Represents adjusted EPS
EBIT (MM): Excludes corporate
EBITDA (MM): Excludes corporate
Organic Growth (%): Organic growth reflects the brokerage segment only
Consensus Estimate: Consensus EPS Estimate; Source: FactSet
Source: Company Data, Wells Fargo Securities estimates, and Refinitiv.
NA = Not Available, NE = No Estimate
Investment Thesis
AJG is positioned to show strong organic revenue growth, continues 
to add bolt-on acquisitions, and is growing its EBITDA. Further, 
the company should benefit from increased scale in reinsurance 
following acquiring Willis Re's treaty reinsurance business. Typically, 
brokers generating the strongest margins have tended to have the 
highest valuations. As a result, we would expect AJG's valuation to 
expand to reflect its stronger ongoing margin profile. We have an 
Overweight rating on the shares.
Risk vs. Reward – Upside/Downside Price Target Scenarios
$162 $207 $252 $297 $344
Upside Scenario
Base Case
Downside Scenario
* $229.89
$287.00
$266.00
$203.00
*As of 10/26/23
Source: Wells Fargo Securities, LLC estimates and Refinitiv.
Base Case | $266.00
• Our price target of $266 is based on 
the combination of a ~25.0x multiple 
of our projected 2024 adjusted EPS 
estimate plus just under $3.00 of value 
we ascribed to the NPV of its clean coal 
investments. Our multiple gives AJG a 
premium to its peers, as the company is 
reporting strong organic growth, seeing 
industry-leading margins, and has a 
healthy M&A pipeline.
Upside Scenario | $287.00
• Our upside scenario of $287 is based 
off of a ~27.0x multiple our projected 
2024 adjusted EPS estimate plus just 
under $3.00 for the company's clean 
coal investments.
• While AJG currently trades at a premium 
to its peers, if the company can continue 
to drive strong organic revenue growth 
and expand margins above peer levels 
we feel that there is room for additional 
multiple expansion.
Downside Scenario | $203.00
• Our downside scenario of $203 reflects 
a roughly ~19.0x multiple of our 
projected 2024 adjusted EPS estimate 
plus just under $3.00 for the company's 
clean coal investments.
• Our downside case reflects AJG 
garnering a multiple that is more closely 
inline with the group average, which we 
would anticipate should the company's 
organic growth and margin expansion 
slow from recent levels.
Upcoming Catalysts
• December Investor meeting and more detailed 2024 guidance
• Monthly pricing surveys
• Any change in GDP forecasts
• Any additional M&A transactions that are announced
Company Description
AJG is the third largest insurance broker, with $8.5 billion of revenue 
from its Brokerage and Risk Management businesses in 2022. 
The company generates approximately 86% of revenue from its 
brokerage business (which includes its benefits business), with the 
remaining roughly 14% from its Risk Management (third party 
claims payment services) operations. AJG has 33,300 employees 
and generates 75% of its revenue in the U.S.

[jouni1]

There isn't much to dislike about AJG except the valuation. Same goes for BRO.

[longterminvestor]

https://www.businesswire.com/news/home/20231103036478/en/Travelers-to-Acquire-Corvus-Insurance

 

Here's an example of the Risk Bearing Insurance Company, Travelers, getting into the MGU game.  MGU Corvus does not bear risk - they broker it.  So on $200M premium they probably make 7.5% (10%max) commission, some fees in there, and some contingents.  Lets say the range in revenue is $20M-$25M. Thats a 17X-20X multiple of topline from a A+ old fashion risk bearer in Travelers.  Some chatter the latest raise at Corvus was at $750M so the last guys in lost money.

 

All the investment banker had to do was whisper "AI proprietary platform" to the acquisitions team at Travelers - boom! Travelers lens maybe they can offer terms on the cherry accounts to put on balance sheet and get some tech.  Still can not get there on this valuation.  

 

I believe Travelers overpaid for Corvus.  Insure-tech platforms are overvalued.  

[thowed]

On 9/21/2023 at 10:26 PM, dealraker said:

AJG clean coal business and of course tax credits

 

I saw this on a presentation: "Gallagher's investments in new clean energy projects and the wind-up of its investments in clean coal production plants."

 

But I can't find any more details - does anyone have any info?  Seems like some people decided that 'clean coal' wasn't actually that clean (I don't know enough to comment) which is presumably why they wound it up, but am curious what they've replaced them with.

Thanks in advance.

[dealraker]

On 10/27/2023 at 3:21 PM, jouni1 said:

There isn't much to dislike about AJG except the valuation. Same goes for BRO.

So if you look at a 10 year chart of AJG you can see that at some point in 2016 the stock price dipped and at that time the PE was half that of today.  This year has been to some degree both groundbreaking and eye-opening to me - and I'm being self-depracating here - as I grew up a little (at 69.5 years old) and found that I could sell stocks in the taxable accounts and not literally die....just as Angela had been telling me for years.  But me being of the era where and when I grew up, I was sorta stuck in the mud emotionally about it all.

 

But anyway it just seems inevitable that the brokers at some point will have something come from somewhere to make all this storybook fairly tale success blow up pretty bad.  I'm 90% plus profit in all of them given they were all 1994 originated so selling isn't a freebee for Angela and me.

 

Life is great...if you can stand it.

 

 

[dealraker]

2 minutes ago, dealraker said:

So if you look at a 10 year chart of AJG you can see that at some point in 2016 the stock price dipped and at that time the PE was half that of today.  This year has been to some degree both groundbreaking and eye-opening to me - and I'm being self-depracating here - as I grew up a little (at 69.5 years old) and found that I could sell stocks in the taxable accounts and not literally die....just as Angela had been telling me for years.  But me being of the era where and when I grew up, I was sorta stuck in the mud emotionally about it all.

 

But anyway it just seems inevitable that the brokers at some point will have something come from somewhere to make all this storybook fairly tale success blow up pretty bad.  I'm 90% plus profit in all of them given they were all 1994 originated so selling isn't a freebee for Angela and me.

 

Life is great...if you can stand it.

 

 

I can easlily remember hoping for 8% annual in the brokers thinking inflation would be 5% or less.  What happened is something I find almost unbelievable and as I've stated many times before I simply can't fathom why some thing or someone hasn't figured out how to disrupt this profitable industry.

 

And on this topic too I'd like to thank longterminvestor as I sold BRP.   It isn't that the stock is down signficantly since I sold as much as I'm just glad I sold the stock.  I have far too much $ in the brokers already, I have no idea why I was buying more.

 

BRP is looking relatively cheap - but may deserve it.  The others are incredibly expensive.  

[longterminvestor]

Maybe looks similar to stock broker valuations compared to the mutual fund valuations they sell. 

[longterminvestor]

On 11/25/2023 at 6:50 PM, dealraker said:

I can easlily remember hoping for 8% annual in the brokers thinking inflation would be 5% or less.  What happened is something I find almost unbelievable and as I've stated many times before I simply can't fathom why some thing or someone hasn't figured out how to disrupt this profitable industry.

 

And on this topic too I'd like to thank longterminvestor as I sold BRP.   It isn't that the stock is down signficantly since I sold as much as I'm just glad I sold the stock.  I have far too much $ in the brokers already, I have no idea why I was buying more.

 

BRP is looking relatively cheap - but may deserve it.  The others are incredibly expensive.  

BRP's cash flow will be impaired for the near/medium term due to earn out payables and the need to pay down debt.  They don't have the money to be acquisitive which is a huge part of the model.  Found the disclosures on BRP's latest "investor deck" compared to actual cash flow statement to be interesting.....see below.

 

 

Actual Cash Flow statement:

Same goes for the other PE backed firms as the debt loaded balance sheets need to be serviced with debt and earn out payables.  

[Spekulatius]

30 minutes ago, longterminvestor said:

BRP's cash flow will be impaired for the near/medium term due to earn out payables and the need to pay down debt.  They don't have the money to be acquisitive which is a huge part of the model.  Found the disclosures on BRP's latest "investor deck" compared to actual cash flow statement to be interesting.....see below.

 

 

Actual Cash Flow statement:

Same goes for the other PE backed firms as the debt loaded balance sheets need to be serviced with debt and earn out payables.  

Yeah FCF not containing earnouts which are cash payments was probably something that soured investors on the stock. This will continue until Q1 2025 according to the CC transcript. They have $332M in remaining earn outs to pay (relative to a $1.1B market cap), which puts considerable strain on their real cash flow. All the stated numbers don't contain this cash outflow.

 

This could be interesting down the road if they get closer to working through the earnouts in late 2024, assuming the numbers come in as expected.

 

Right now, they are seeing the limits of their acquisition driven business model.