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

[longterminvestor]

BRP reported today with a net loss for the year 2X previous year.  Producer comp/EE expense as percentage portion of topline commission increased to 75%.  That is unbelievably HIGH.  For comparison, a shrewd disciplined operator like BRO is closer to 53% (shooting for under 50%).  Share count for BRP is up 5.8% YOY and up 26% since 2021.  Related figure, share based comp expense, is up to $60M in 2023 from $47M in 2022 and $19M in 2021.  

 

They lose money on operations (NET operating loss is $42M) and then throw in $119M of interest expense and it boggles the mind on how this is investable.  The business only paid $1.2M in taxes because of the carry forward losses and continued loss on operations.  Factor in taxes on the expenses in ops and this thing can't make a profit for a long...long time.   Sorry I forgot, management's metric is adjusted EBITDA and the T stands for taxes.  

 

Amortization expense seems aggressive as well (dont know this as well as I wish I did).  Here are some numbers comparing to BRO (maybe someone can help).  

 

BRP Goodwill as of 2023: $1.4B

BRP Amortization for 2023: $92M

 

BRO Goodwill as of 2023: $7.3B

BRO Amortization for 2023: $166M

 

[dealraker]

18 minutes ago, longterminvestor said:

BRP reported today with a net loss for the year 2X previous year.  Producer comp/EE expense as percentage portion of topline commission increased to 75%.  That is unbelievably HIGH.  For comparison, a shrewd disciplined operator like BRO is closer to 53% (shooting for under 50%).  Share count for BRP is up 5.8% YOY and up 26% since 2021.  Related figure, share based comp expense, is up to $60M in 2023 from $47M in 2022 and $19M in 2021.  

 

They lose money on operations (NET operating loss is $42M) and then throw in $119M of interest expense and it boggles the mind on how this is investable.  The business only paid $1.2M in taxes because of the carry forward losses and continued loss on operations.  Factor in taxes on the expenses in ops and this thing can't make a profit for a long...long time.   Sorry I forgot, management's metric is adjusted EBITDA and the T stands for taxes.  

 

Amortization expense seems aggressive as well (dont know this as well as I wish I did).  Here are some numbers comparing to BRO (maybe someone can help).  

 

BRP Goodwill as of 2023: $1.4B

BRP Amortization for 2023: $92M

 

BRO Goodwill as of 2023: $7.3B

BRO Amortization for 2023: $166M

 

I appreciate your participation on this forum.  I sold BRP based on the clarity you brought to the table and never looked back.  When I was younger, and poorer, I'd have spent far more time doing my DD, but I've gotten lazy I guess.  LOL!

 

Thanks again longterminvestor.  

[longterminvestor]

Seems like the voting machine is alive and well while the weighing machine is colleting dust with this name.  Just trying to learn and be an active investor doing the work.  Writing it out helps me frame in my head and challenges me to find clarity.  Anonymously sharing my work is easy however I would let my mouth run with confidence on this name with management if they ever showed up on my doorstep.  Just can't get my financial mind around BRP.  

[dwy000]

40 minutes ago, longterminvestor said:

Seems like the voting machine is alive and well while the weighing machine is colleting dust with this name.  Just trying to learn and be an active investor doing the work.  Writing it out helps me frame in my head and challenges me to find clarity.  Anonymously sharing my work is easy however I would let my mouth run with confidence on this name with management if they ever showed up on my doorstep.  Just can't get my financial mind around BRP.  

Just listened to the call.  Boy it's tough to wade through the cash vs adjusted numbers. 

 

FYI, on the broker compensation, a portion of the earnouts from businesses acquired were  allocated by the sellers to people who were not "selling shareholders" (sounds like the owners gave a portion of the earnout to the rainmakers who otherwise weren't actually shareholders).  As a result, they had to reallocate a portion of the earnout payments into compensation and that drove the number up to the very high levels you pointed out.  It's why EBITDA margins were similar despite the higher comp number.  

 

They still have a massive amount of earnout to pay during 1Q.  They've sold the wholesale business to help fund it ($34m rev business with $5 EBITDA that they sold for $59m cash)

 

Free cash flow from operations is forecast at $165-195m for full year 2024.  That will all go to earnouts I guess but those should largely be done in 2024.

Edited February 29 by dwy000

[longterminvestor]

I listened to call as well, quote: "add back for compensation expense in Q4 was $8M and expected to 7M in Q1 2024".  Small potatoes in relation to comp expense overall.  If you want to compare same type of measure, look to RYAN.  They have similar issue and running same earn out provision thru comp expense, however RYAN's comp to rev  ratio starts at 64% and is adjusted to 59% as percentage of revenue.  64% actual and 59% adjusted is still high for RYAN however starting from a lower base % helps in the long run as well as RYAN aggressively hires organically in addition to acquisition earnout passthrough which will be reduced over time.  

 

Dont know if I could call $59M full value for wholesale brokerage biz at $34M topline with these eye popping numbers we are seeing with purchases - kinda weak at $5M/15% "adjusted" EBITDA (adjusted in quotes for effect).  Sounds like AmWins gifted them the $59M with a wink saying we will take this off your hands but you better send us some business.  BRP obviously needs cash.  My sense is they had too much turn over in that business and just needed to dump it.  Color on future acquisitions was fuzzy - I pictured in my mind a fanciful CEO tap dancing for analysts.  

 

So difficult to watch when you see everyone else making money hand over fist in the space and these guys just get a pass for posting loss after loss after loss.  5 years as a public company and BRP has never made a dime posting a loss each year.  Cumulatively thats $351M in total net loss for 5 years.  I am looking forward to seeing how the movie plays out for sure.  I'm not going anywhere.  I have been pretty hard on these guys and will continue to be until there is reason otherwise.  Maybe someday I could own this at a price commensurate with its value, once all the babies are thrown out with the bathwater - I guess I gotta be open to that years and years down the line from where I sit today.  

[sleepydragon]

These group of stocks had a small correction. It’s a little bit cheaper now.

 

Any suggestions which one is the best one to buy here for long term coffee can holding?

 

 

[Lance]

No suggestion here, but would imagine Dealraker has some insight into that.  I’ve gone with a basket approach and hold all of them (AJG, AON, BRO, MMC and WTW) plus ERIE.

 

Thanks

Lance

[dealraker]

10 hours ago, Lance said:

No suggestion here, but would imagine Dealraker has some insight into that.  I’ve gone with a basket approach and hold all of them (AJG, AON, BRO, MMC and WTW) plus ERIE.

 

Thanks

Lance

The unflattering truth is that while I've owned the brokers except for BRP and RYAN since 1994 I've only added to BRO and WTW since then and that proves I'm not in any way a good caller on these thus far delightful businesses.  I just keep thinking - for instance - that BRO is expensive, and it never turns out that way, and 41% of my net worth as to stocks is my AJG shares so I'm not going to buy more.  I did influence my investment club to buy AJG at $36 or so in 2015 (or whenever it dropped...and was selling for 15x with a 3.8% div), but personally didn't buy more.  I did buy AJG for my wife's parents trust recently at $185 and sometime in the early 2000's period my brother-in-law asked me to "manage" $800,000k of his stuff and I impulsively told him to put it all into BRO---- which he did!  That was a home run for him, but it wasn't some well-thought out analysis from me and he has so much money he doesn't know what to do with it so I wasn't at all worried that he would get hurt making a large commitment there and I figured at worst it would do pretty good.   

 

 

Edited April 21 by dealraker

[Xerxes]

28 minutes ago, dealraker said:

 sometime in the early 2000's period my brother-in-law asked me to "manage" $800,000k of his stuff and I impulsively told him to put it all into BRO---- which he did! 

 

 

I love it every time you mention this. 

[longterminvestor]

Recent writeup VIC on RYAN.  

RYAN SPECIALTY HOLDINGS INC.pdf

[valueseek]

With the fallout in $KNSL shares, any thoughts on the name @longterminvestor ? Every time you listen to Michael Kehoe, one feels he is a owner operator you want to partner with. 

[longterminvestor]

22 hours ago, valueseek said:

With the fallout in $KNSL shares, any thoughts on the name @longterminvestor ? Every time you listen to Michael Kehoe, one feels he is a owner operator you want to partner with. 

No opinion on KNSL, they are not a broker - they are a risk bearer.

Edited April 29 by longterminvestor

[longterminvestor]

Did a little study on historic financials on the top 5 brokers using Value Line metrics and transposed numbers into spreadsheet.  Attached is the PDF I typed to show numbers side by side (hope there are no glaring typos - apologies if there are) and Value Line for each company where data came from.

 

Notes below by company:

 

AJG

- Diluting more than I knew with share issuance (41% more shares out over 10yrs)

- Tax rate from 2014-2019 was a huge advantage to AJG over other brokers (clean coal credits)

- EPS is being hurt by share issuance

- Revenue is up 117% over 10yrs

- Net Profit margin lags the group

 

BRO

- Leader in Revenue Growth (170% increase over 10yrs)

- Leader in Net Profit Growth (320% over 10yrs)

- Consistently leads on Operating Margin (believe this to be at the core of BRO's success long term)

- Being small has been a tailwind for BRO

 

WTW

- Numbers start 2016 with merger of Willis and Towers Watson (merger of equals)

- Nice share reduction over past 3yrs (25% reduction over past 8yrs)

- Leader in EPS Growth (8yrs vs 10yrs with group) - because of buybacks alone not growth - still impressive and surprising!!

- WEAK revenue growth - actually kind of embarrassing considering peers.  

 

AON

- Leader of group with 29% reduction of shares outstanding

- Looks like AON got religion regarding Operating Margin around 2017

- Unimpressively lags group on 10yr revenue growth at 11.05%

- Leader on Return on Total Capital is impressive

- No revenue growth which is tough (recent purchase of NFP could help solve this - entering middle market)

 

MMC

- Leader in topline revenue

- Size is hurting growth according to data

- Leader of group on Return on Share Equity metric and by almost 2X (solid)

 

OVERALL INTERESTING OBSERVATIONS

- MMC vs AON - revenues basically the same in 2014 but MMC pulls away however AON stays close on Net Profit even with substantially less topline revenue.  

- Net Profit is just explosive for the group respectively which speaks to the broker model being an incredible franchise. 

- Prediction: when acquisitions become more difficult due to lack of supply, brokers will redirect capital to buy backs/dividends which will continue to be accretive for investors.

 

TRYING TO SUSS OUT WHAT WILL GO WRONG FOR THIS GROUP?

- Years 2008/2009 was the only example where we had a reduction in both an insurance rate environment and a reduction in exposure units - the "double whammy" was really really tough for brokers.  

 

 

 

PUBLIC BROKERS - selected numbers side by side.pdf VALUE LINE - AJG, BRO, WTW, AON, MMC.pdf

[thowed]

Many thanks @longterminvestor, this is really helpful.  

[buylowersellhigh]

@longterminvestor so what did you decide to do?  AON looks interesting from a valuation perspective.  Good share cannibal and recently closed on the NFP acquisition.

[sleepydragon]

I bought some MMC as a tracking position today 

[Spekulatius]

I personally think after looking at all of the them that BRO and AJG are the best picks here. I only have a small position in BRO bought a bit more than a year ago and it’s as close to a neversell than you can get.

[dwy000]

BRP going off this morning.  Not entirely sure why - the results were good but not that good.  The overhang of debt ($1.3bn) and contingent payouts ($225m - all current) are going to be a drag for a while.  They were able to fund it all by selling a business for $56m during the quarter.  

[dealraker]

So here goes another somewhat on topic but not specific to a stock chirping from me, so beware and tolerate...or not.

 

Last night my bright ass decided that we'd go by boat to my insurance agency owner friends house to have dinner.  This is a 8-ish mile boat trek which is hampered by the fact that my wife has just gotten a second bunion surgery.  Let me tell you something, these bunion surgeries are painful and long-recovery things.  Life sort of gets shut down for someone well over 50 who had one of these operations and they need assistance.

 

Logistical clear thinking and some work got us successfully boating there and we had a great time.  Then just as we re-mounted the boat to go home all living hell broke out with winds and thunderstorms.  Warm water and being able to go slow and stay close to shore (an easy swim should we sink- being silly but you know there's always the chance) made it somewhat humorously stressful to spend the hour plus of time on the journey.  

 

We made it home and I got her into the house engaging one wet slippery place after another.  We get this boat (we have a few) into the covered (normally dry but not last night with horizontal rain) with ease without having to get out to do anything...so that part worked well.  But slippery and bunion work are't compatible at all.

 

But anyway the conversation, laced with $100 bottles of wine (I'm a light drinker but my friend isn't), got the chattin' both alive and revealing and for a while it went "business".  Anyway his business is a very large (for North Carolina) insurance commission one, it is incredibly profitable (he has two multi-million dollar homes and is one of our largest local real estate owners), and he said again last night the big boys...especially AJ Gallagher...come calling every week.  He says they come disguised at times...no not in some Trojan Horse manner of evil, but in forms of "come on dude...we're gunna give you so much money you don't know what to do with it all."

 

Anyway, I'm just telling you guys that this business, the one we too can invest in, continues to be slam-damn wonderful.  Makes me endlessly wonder, and we discussed this last night, when it is going to end!  When's Amazon "your profit is my gain" gunna come?  My friend says he runs that issure through his mind all the time, yet he still thinks nothing is anywhere close to ruining this gravy train.

 

My guess is there will be something fairly soon (a year or two) that interrupts both the insurance pricing upturn and the stock prices too of the publicly traded US brokers.  To me, for those not here yet, it will probably be a wonderful buying opportunity if, and only if, history repeats itself.  My guess is history will repeat itself!

 

Generalized thinking such as this isn't much credited with being significant as to making money investing.  We go into great detail often and my past is literally full of massive invasive accounting projects that I did to determine investment potential.  Over time I moved on some from this, I saw far too many others making hay without huge amounts of work or analysis.  And I got my lifelong biggest eye-opening realizing that selling too soon was the typical investors worst mistake particularly if made on a basis of "the PE is 25....oh boy gotta run for the hills" and such.

 

So I'm just slobbering around on a topic here, but it is one to keep on the shelf for use at some point for some of you.  No spell check here, I'm conversationally rambling.  

[dealraker]

Incidentally I'll add that my friend mentioned above never went to college of any sort and began working in the business at 18.  Based on the numbers he let out last night I'd guess his operation is worth a minimum of $50 million via a sale to AJG.   

[coffeecaninvestor]

1 hour ago, dealraker said:

So here goes another somewhat on topic but not specific to a stock chirping from me, so beware and tolerate...or not.

 

Last night my bright ass decided that we'd go by boat to my insurance agency owner friends house to have dinner.  This is a 8-ish mile boat trek which is hampered by the fact that my wife has just gotten a second bunion surgery.  Let me tell you something, these bunion surgeries are painful and long-recovery things.  Life sort of gets shut down for someone well over 50 who had one of these operations and they need assistance.

 

Logistical clear thinking and some work got us successfully boating there and we had a great time.  Then just as we re-mounted the boat to go home all living hell broke out with winds and thunderstorms.  Warm water and being able to go slow and stay close to shore (an easy swim should we sink- being silly but you know there's always the chance) made it somewhat humorously stressful to spend the hour plus of time on the journey.  

 

We made it home and I got her into the house engaging one wet slippery place after another.  We get this boat (we have a few) into the covered (normally dry but not last night with horizontal rain) with ease without having to get out to do anything...so that part worked well.  But slippery and bunion work are't compatible at all.

 

But anyway the conversation, laced with $100 bottles of wine (I'm a light drinker but my friend isn't), got the chattin' both alive and revealing and for a while it went "business".  Anyway his business is a very large (for North Carolina) insurance commission one, it is incredibly profitable (he has two multi-million dollar homes and is one of our largest local real estate owners), and he said again last night the big boys...especially AJ Gallagher...come calling every week.  He says they come disguised at times...no not in some Trojan Horse manner of evil, but in forms of "come on dude...we're gunna give you so much money you don't know what to do with it all."

 

Anyway, I'm just telling you guys that this business, the one we too can invest in, continues to be slam-damn wonderful.  Makes me endlessly wonder, and we discussed this last night, when it is going to end!  When's Amazon "your profit is my gain" gunna come?  My friend says he runs that issure through his mind all the time, yet he still thinks nothing is anywhere close to ruining this gravy train.

 

My guess is there will be something fairly soon (a year or two) that interrupts both the insurance pricing upturn and the stock prices too of the publicly traded US brokers.  To me, for those not here yet, it will probably be a wonderful buying opportunity if, and only if, history repeats itself.  My guess is history will repeat itself!

 

Generalized thinking such as this isn't much credited with being significant as to making money investing.  We go into great detail often and my past is literally full of massive invasive accounting projects that I did to determine investment potential.  Over time I moved on some from this, I saw far too many others making hay without huge amounts of work or analysis.  And I got my lifelong biggest eye-opening realizing that selling too soon was the typical investors worst mistake particularly if made on a basis of "the PE is 25....oh boy gotta run for the hills" and such.

 

So I'm just slobbering around on a topic here, but it is one to keep on the shelf for use at some point for some of you.  No spell check here, I'm conversationally rambling.  

Thanks Dealraker for the story. 50% of the reason I bought the membership was for your commentary.

 

You have been following the industry much longer than I have. Has there been competitor or new entrant that has tried to threaten then industry, but been unsuccessful? 

[dwy000]

2 hours ago, dealraker said:

So here goes another somewhat on topic but not specific to a stock chirping from me, so beware and tolerate...or not.

 

Last night my bright ass decided that we'd go by boat to my insurance agency owner friends house to have dinner.  This is a 8-ish mile boat trek which is hampered by the fact that my wife has just gotten a second bunion surgery.  Let me tell you something, these bunion surgeries are painful and long-recovery things.  Life sort of gets shut down for someone well over 50 who had one of these operations and they need assistance.

 

Logistical clear thinking and some work got us successfully boating there and we had a great time.  Then just as we re-mounted the boat to go home all living hell broke out with winds and thunderstorms.  Warm water and being able to go slow and stay close to shore (an easy swim should we sink- being silly but you know there's always the chance) made it somewhat humorously stressful to spend the hour plus of time on the journey.  

 

We made it home and I got her into the house engaging one wet slippery place after another.  We get this boat (we have a few) into the covered (normally dry but not last night with horizontal rain) with ease without having to get out to do anything...so that part worked well.  But slippery and bunion work are't compatible at all.

 

But anyway the conversation, laced with $100 bottles of wine (I'm a light drinker but my friend isn't), got the chattin' both alive and revealing and for a while it went "business".  Anyway his business is a very large (for North Carolina) insurance commission one, it is incredibly profitable (he has two multi-million dollar homes and is one of our largest local real estate owners), and he said again last night the big boys...especially AJ Gallagher...come calling every week.  He says they come disguised at times...no not in some Trojan Horse manner of evil, but in forms of "come on dude...we're gunna give you so much money you don't know what to do with it all."

 

Anyway, I'm just telling you guys that this business, the one we too can invest in, continues to be slam-damn wonderful.  Makes me endlessly wonder, and we discussed this last night, when it is going to end!  When's Amazon "your profit is my gain" gunna come?  My friend says he runs that issure through his mind all the time, yet he still thinks nothing is anywhere close to ruining this gravy train.

 

My guess is there will be something fairly soon (a year or two) that interrupts both the insurance pricing upturn and the stock prices too of the publicly traded US brokers.  To me, for those not here yet, it will probably be a wonderful buying opportunity if, and only if, history repeats itself.  My guess is history will repeat itself!

 

Generalized thinking such as this isn't much credited with being significant as to making money investing.  We go into great detail often and my past is literally full of massive invasive accounting projects that I did to determine investment potential.  Over time I moved on some from this, I saw far too many others making hay without huge amounts of work or analysis.  And I got my lifelong biggest eye-opening realizing that selling too soon was the typical investors worst mistake particularly if made on a basis of "the PE is 25....oh boy gotta run for the hills" and such.

 

So I'm just slobbering around on a topic here, but it is one to keep on the shelf for use at some point for some of you.  No spell check here, I'm conversationally rambling.  

Always great to hear the somewhat inside thoughts.  And hope your wife's foot gets better soon (I'm sure $100 bottles of wine helps a lot).

 

I'd love for any of these to trade down to a "reasonable" level.  I know they never do and I'm just going to miss the next leg up by waiting but there's just too much of the "stars all aligning" for the industry for this to last at current levels.  Any sort of correction would be a great buying g opportunity

[Spekulatius]

13 minutes ago, dwy000 said:

 

I'd love for any of these to trade down to a "reasonable" level.  I know they never do and I'm just going to miss the next leg up by waiting but there's just too much of the "stars all aligning" for the industry for this to last at current levels. 

The insurance brokers did trade down to ~20x earnings (not trailing but current earnings) just a year ago in early 2023. These corrections happen from time to time. Even then, it felt like I had to squint to buy some  BRO shares (my only holding in that space). Correction happen with all socks, good or bad business and we will see them again for insurance brokers.

 

On when the gravy train stops, my thinking is that it won’t for a while, because the market is so fragmented and will stay that way. One reason for this is that insurance is regulated by state so insurance contracts differ by state, which is something you quickly become aware of if you moved as much as I did. So even if you stay with one insurance co, your contract will differ from state to state, but in many cases, insurance cos will write insurance in one state, but not in another.

 

Having different regulators and rules in 50 different states makes it harder to simplify insurance and moving it all online, which is why brokers play an important role.

[gfp]

Thanks Charlie for the color as always.  Wishing Angela a speedy recovery.

 

As for waiting on a dip to invest, it does help to either have a watch list, or what works better for me is just a few shares of each broker so that you see the decline on your screen when you log in to your broker.

 

There was a brief opportunity in late 2022 in RYAN specialty that was immediately followed by Form 4 insider buying from the CEO - that's always a nice green light. 

 

(one of the reasons I have religiously looked at form 4 insider purchases every day for my entire career is that you can get alerted to a drop in price followed by insiders bingeing on share for companies you wouldn't have noticed or been aware of any other way - you also get to know insiders in certain companies that are always great signals.  Selling gives you no real useful information but an insider purchasing additional shares in the open market with their own after-tax hard earned cash - when they likely already have a significant portion of their net worth tied up in the stock - can be a really great screener or lead generator or whatever)

Edited May 27 by gfp

[Xerxes]

Thanks. 
 

I don’t know the full extent of the history but just as FYI at some point the Canadian P/E shop Onex was a major investor of Ryan. 
 

https://ryanspecialty.com/news/rsg-announces-investment-by-onex/