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

[UK]

16 minutes ago, dealraker said:

UK, anything you write is fair, I've seen it for a long time.

 

The answer begins with...it wasn't too long ago that we had a family member die and I was the person chosen to handle the trust.  I posted about that....that I bought some  AJG (this wasn't long ago) at $185 per share.  I put more though into Berkshire.  Someone asked me on this forum why I didn't put more into AJG vs Berk and I rambled some crazy response, but it was of course very likely a poor decision not to buy more AJG.

 

But price and time, and industry conditions, have changed.  Today I'd not invest in AJG at this valuation level.  Would this investment if done today likey outperform Mr. Market, the question most ask that I never consider?   Probably.

 

I'd wait, it seems we are somewhat too excited and happy right now as to this sector.  Won't last.  

 

 

 

 

Thank you for answering!

[dwy000]

I tend to agree with the transparency argument.  While complexity and customization is definitely a factor, in other industries most outsized broker or agency rates have come down due to transparency (as well as the internet taking away information advantage).  When you buy or sell a house, you know exactly how much you're getting for the house and how much the broker is getting.  When you buy a stock, bond or option, you know exactly how much the stock costs and how much the commission is (often free now!).  But when you buy insurance, all you see is the premium(s).  You have no idea how much of that is true underwriting risk, how much is administration and how much is commission.  If they were forced to break out those numbers in your premium it would be too easy to go to another broker and say "beat this price" and they could do it with the exact same underwriter.  I can't see a circumstance where anyone (other than the customer) wants to have that level of transparency and kill the golden goose.  So maybe the anomaly continues for the indefinite future.

[73 Reds]

4 minutes ago, dwy000 said:

I tend to agree with the transparency argument.  While complexity and customization is definitely a factor, in other industries most outsized broker or agency rates have come down due to transparency (as well as the internet taking away information advantage).  When you buy or sell a house, you know exactly how much you're getting for the house and how much the broker is getting.  When you buy a stock, bond or option, you know exactly how much the stock costs and how much the commission is (often free now!).  But when you buy insurance, all you see is the premium(s).  You have no idea how much of that is true underwriting risk, how much is administration and how much is commission.  If they were forced to break out those numbers in your premium it would be too easy to go to another broker and say "beat this price" and they could do it with the exact same underwriter.  I can't see a circumstance where anyone (other than the customer) wants to have that level of transparency and kill the golden goose.  So maybe the anomaly continues for the indefinite future.

Back in the day OTC stock commissions were hidden in the "spread".  And frankly, its not that different than going to your doctor and then getting a bill for the "uninsured" portion.

[longterminvestor]

little chatter on AJG.  vid starts there.  its not that long but wanted to keep the thread alive.  

 

 

[dealraker]

longterminvestor the thing I mostly get from the short clip in the video is the same as I've gotten in my 37 years of being in this business - 30 as a publicly traded shareholder.   Investors touch-and-go on it, but don't stick around much, there's too much more mentally stimulating stuff for highly intelligent people needing challenges to investigate. 

 

Along the same lines it is a normal discussion in the insurance business to say, "Well if you can't compete here you can always go sell."   

Edited September 25 by dealraker

[tnathan]

Does anyone have thoughts on TWFG? They IPO'ed in July here is the s-1 https://www.sec.gov/Archives/edgar/data/2007596/000162828024029560/twfginc-sx1.htm

[longterminvestor]

TWFG (The Woodlands Financial Group) – it’s a Personal Lines outfit

 

I have built this mental model in my head for competitors in a certain class of business, I am always looking for the dual monopoly, for example there is “a Coke” and “a Pepsi” and then everyone else.  If Goosehead is Coke, then TWFG is Pepsi.  The metaphor is for when a business model works, there will be a competitor.  The metaphor is not to compare financial staying power/market dominance of a Coke/Pepsi debate.  TWFG does do commercial insurance where Goosehead is strictly Personal Lines.  TWFG is based in Texas, so is Goosehead. 

 

TWFG, founded by Richard “Gordy” Bunch, III.  $180M topline revenue in 2023.  The revenue comes from “Agencies in a Box” Captive Agencies, MGA’s (captive to TWFG and sell to non-TWFG agents), “independent branches”, and corporate branches.  With over 400 Agencies in a box representing 77% of revenue and 14 Corporate Branches representing 4% of revenue and 2 MGA’s representing roughly 18% of revenue (over 2000 appointed agencies with TWFG’s owned MGA facility). 

 

Average commission for TWFG on a deal is 12% - fine/solid – could be cut or could grow.  TWFG has pre-set calculation to buy agency in a box and become a corp branch.  Has done this in the past.  Branches over $1M revenue and geographically desired could be a target. 

 

TWFG does not bear expense of running the branches but sends the revenue to them.  Seems like each branch has a direct split bases on (taken from S-1):“Unlike some other insurance distribution models, the operating costs incurred by our Branches do not transfer to TWFG. Instead, we receive all commission revenue and subsequently pay and record a commission expense to each Branch based on the relevant exclusive Branch agreement”.

 

The Parent company retains 20% of revenue and cedes 80% to branch.  Found this language interesting in S-1:

 

Exclusive Branch agreements

We enter into exclusive Branch agreements with our Branches under which the Branch operates as an independent contractor. TWFG receives 100% of the commission revenue on the Branch’s Book of Business that is paid by the insurance carriers and typically remits 80% of the commission revenue to the Branch, while typically retaining 20%of the commission revenue and 100% of all contingency commission revenue. The Branches are responsible for all of their operating costs, including fees for technology, E&O premiums and other services charged by us. The exclusive Branch agreement requires the Branch to exclusively sell insurance products through TWFG’s insurance carrier relationships. Our exclusive Branch agreements are straight-forward and written in plain English.

 

When the Branch reaches a minimum term and threshold of commission revenue, the Branch is granted the right to require TWFG to purchase the Branch’s Book of Business upon termination of the Branch agreement at a negotiated price. The Branch agreement remains in force indefinitely, unless earlier terminated by either party with 30 days advance notice or immediately by TWFG in the case of fraud, bankruptcy, death and other events. Upon termination of the Branch agreement, the Branch must sell its Book of Business related to P&C products to TWFG or another TWFG-approved Branch at an agreed upon valuation, or if the parties cannot agree, at a valuation determined by independent appraisal. TWFG also has a right of first refusal on any proposed sale of the Branch to a third party. Our Branch agreements require confidentiality of all Client information and include Client non-solicitation clauses that generally stay in effect for two years following termination of the Branch agreement and our purchase of the Branch’s Book of Business.

 

Within TWFG’s product offerings, each Branch may utilize the products that best serve its Clients. Branch principals also have a high degree of autonomy in which to operate their business and expand their footprint.

Branches use our comprehensive technology and agency management system, benefiting from enterprise group rates that we believe are typically lower than agents would receive on their own or from leading agency management system vendors. Branches also participate in TWFG’s group professional liability E&O insurance policy, benefiting from a reduced group rate, as TWFG passes these savings on to our Branches.

 

TWFG is jumping on the dislocation of insurance agencies in the small business/personal lines marketplace.  TWFG has GREATLY benefited from the hard market and wondering if the growth they have had in the past is sustainable.  People shop when they get non-renewed, canceled, price increases significantly, ect.  That’s been happening a lot in the past 3 years, if the insurance market stabilizes, wonder if TWFG (or Goosehead as well) will get the looks on accounts like they have over the past 3 years.  TWFG has scale now so total destruction is not what I am talking about, its just can it grow in the same manner it has for the previous few years. 

 

A bet on TWFG is a bet on Gordy – he controls the business with 3 classes of shareholder stock.  It is profitable (I’m shocked).  Same Up-C, Tax Receivable Agreement as Baldwin.  I guess TRA’s are socially acceptable now. 

At 40X earnings, its pricey for me – however people like Goosehead at 49X earnings. 

 

I will be watching it. 

 

[longterminvestor]

Headline: Marsh Buys McGriff (ACTUAL STORY-MIDDLE MARKET IS WHERE THE MONEY IS)

 

FACTS ON WHAT IS HAPPENED:

 

Stonepoint Investment Group purchased Truist Insurance Holdings (TIH) with an implied value at $15.5B – deal was closed May 7^th 2024 – it was an ALL CASH transaction which McGriff was the “retail facing brand” inside TIH who is a “middle market agency”. Stonepoint Investor Group players to include: United Arab Emirates’ Sovereign Wealth Fund named “Mubadala Investment Company” & other PE name Clayton Dubilier & Rice.   

 

Enter Big Daddy Marsh using their middle market brand Marsh McLennan Agency (MMA) to buy McGriff for $7.75B IN CASH 6 MONTHS LATER?!? – EXACTLY 50% of the value of Truist Holdings deal previously closed. This takes 50% of the implied value out of the Truist Holdings deal.  I mean, imagine being a producer at McGriff right now, their heads must be spinning. 

 

Marsh needed a big uppercut to AON after their purchase of NFP, which was AON’s entrance into true middle market. 

 

MY OPINION:

 

If ultimate goal of Stonepoint Investor Group is to IPO this thing, why sell off the retail facing piece?  If the deals are all cash, there are no issues with debt, why not just keep the retail facing business inside?  2 ideas I have: #1 Gotta be transactional fees/fees/fees for the funds incentivized to “do deals” and #2 – Stonepoint may have gotten VERY expensive debt on the backend and needed to pay it off fast….only 2 conclusions I have at this time. 

 

This transaction cements my feelings towards the short/medium/long term outlook for Middle Market Brokers (BRO is the best of the lot). For many years they have stayed under the radar in middle market allowing the big 5 to chase after each other for the Fortune 500. The secret of middle market is no longer a secret.  Everyone figured it out, PE backed brokers, Big 5, and others know the institutional accounts are a race to the bottom comp wise so now the big broker cohort has turned their cannons to the “middle market” which BRO/other middle market specialists have been feasting on for years. 

 

Short term BRO and other middle market brokers are fine, medium/long term they will face increased competition for accounts as the big brokers deploy sales force to take their biz/future biz. 

 

 

Marsh McLennan to acquire McGriff Insurance Services _ MMA.pdf

[dwy000]

1 hour ago, longterminvestor said:

Headline: Marsh Buys McGriff (ACTUAL STORY-MIDDLE MARKET IS WHERE THE MONEY IS)

 

FACTS ON WHAT IS HAPPENED:

 

Stonepoint Investment Group purchased Truist Insurance Holdings (TIH) with an implied value at $15.5B – deal was closed May 7^th 2024 – it was an ALL CASH transaction which McGriff was the “retail facing brand” inside TIH who is a “middle market agency”. Stonepoint Investor Group players to include: United Arab Emirates’ Sovereign Wealth Fund named “Mubadala Investment Company” & other PE name Clayton Dubilier & Rice.   

 

Enter Big Daddy Marsh using their middle market brand Marsh McLennan Agency (MMA) to buy McGriff for $7.75B IN CASH 6 MONTHS LATER?!? – EXACTLY 50% of the value of Truist Holdings deal previously closed. This takes 50% of the implied value out of the Truist Holdings deal.  I mean, imagine being a producer at McGriff right now, their heads must be spinning. 

 

Marsh needed a big uppercut to AON after their purchase of NFP, which was AON’s entrance into true middle market. 

 

MY OPINION:

 

If ultimate goal of Stonepoint Investor Group is to IPO this thing, why sell off the retail facing piece?  If the deals are all cash, there are no issues with debt, why not just keep the retail facing business inside?  2 ideas I have: #1 Gotta be transactional fees/fees/fees for the funds incentivized to “do deals” and #2 – Stonepoint may have gotten VERY expensive debt on the backend and needed to pay it off fast….only 2 conclusions I have at this time. 

 

This transaction cements my feelings towards the short/medium/long term outlook for Middle Market Brokers (BRO is the best of the lot). For many years they have stayed under the radar in middle market allowing the big 5 to chase after each other for the Fortune 500. The secret of middle market is no longer a secret.  Everyone figured it out, PE backed brokers, Big 5, and others know the institutional accounts are a race to the bottom comp wise so now the big broker cohort has turned their cannons to the “middle market” which BRO/other middle market specialists have been feasting on for years. 

 

Short term BRO and other middle market brokers are fine, medium/long term they will face increased competition for accounts as the big brokers deploy sales force to take their biz/future biz. 

 

 

Marsh McLennan to acquire McGriff Insurance Services _ MMA.pdf 124.36 kB · 2 downloads

On its headline, Marsh seems to be getting quite a deal at less than 6x revenues.  Plus there's a $500m deferred tax asset included. If Stonepoint bought Truist 6 months ago it's likely your assumption of refinancing high cost debt is playing a role here.