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.

[Spekulatius]

$112 - the stock is now a double for me. Not a large position, but now I can cheer Go $Bro! I also made some friends along the way.

 

Results look very good to me:

https://investor.bbinsurance.com/news-releases/news-release-details/brown-brown-inc-announces-third-quarter-2024-results-including

Edited November 10 by Spekulatius

[valueventures]

While all the names referenced in this thread have been quality compounders, they obviously have large market caps.

 

Curious if anyone has thoughts on companies that are more small-to-mid cap in size that are earlier in their compounding lifecycles. I own FFH over BRK because it is much smaller and should therefore compound from a lower base, and am looking for a similar dynamic among insurance brokers.

 

Thanks!

[dealraker]

21 hours ago, valueventures said:

While all the names referenced in this thread have been quality compounders, they obviously have large market caps.

 

Curious if anyone has thoughts on companies that are more small-to-mid cap in size that are earlier in their compounding lifecycles. I own FFH over BRK because it is much smaller and should therefore compound from a lower base, and am looking for a similar dynamic among insurance brokers.

 

Thanks!

The insurance brokers are running along in the higher end of their pricing cycle which corresponds to what is surely maybe the best environment in their history.  Life is good!

 

As to grasping the business?  longterminvestor who posts right here has many excellent rants - that if you are a detailed type - can do a sound job of delivering information as to insight into the businesses.  There are industry publications too, but I'd go with reading a BRO or AJG annual report or conference call for further insight.

 

As I have posted before, owning the stocks is a good way to understand the businesses.  Finding a decent starting spot is the hard part.  After that?  Well, the less I think and "understand" the business........the more money I make.

 

 

Edited November 29 by dealraker

[dealraker]

This is a big one:

 

GTCR Announces Sale of AssuredPartners to Arthur J. Gallagher & Co. for $13.45 Billion

 

 

 

Edited December 9 by dealraker

[longterminvestor]

dealraker......I knew you would be on the informational edge.

 

Brief dive into transaction.  Transaction based on "Proforma Revenues & EBITDAC".....how does one proforma-lize top line revenues?  

 

Love LOVE Jim Henderson's negotiating skills (Old School insurance guy who was gracefully pushed out of Brown & Brown and started AP) - "we want USD paper- cash only, we don't want your AJG paper".   So AJG says, "that's fine Jim.  We will write you a check and dilute our shareholders by raising the cash in the market by selling shares".  Happy for the guys at AP, what a testament to business model of insurance distribution. AP was seeded by PE, sold/re-capped multiple times.  

 

Quote from PE Fund who owned AP press release: "Over the past 13 years, the Company has acquired and successfully integrated over 500 businesses, building a national leader in insurance brokerage. GTCR originally sold the Company to Apax Fund VIII in 2015, and GTCR reacquired a majority stake in partnership with Apax Fund IX in 2019. Today, the business is led by Mr. Henderson and CEO Randy Larsen."

 

I may dive deeper into the numbers but these sky high valuations are incredible.  

Edited December 9 by longterminvestor

[Dinar]

52 minutes ago, longterminvestor said:

dealraker......I knew you would be on the informational edge.

 

Brief dive into transaction.  Transaction based on "Proforma Revenues & EBITDAC".....how does one proforma-lize top line revenues?  

 

Love LOVE Jim Henderson's negotiating skills (Old School insurance guy who was gracefully pushed out of Brown & Brown and stared AP) - "we want USD paper- cash only, we don't want your AJG paper".   So AJG says, "that's fine Jim.  We will write you a check and dilute our shareholders by raising the cash in the market by selling shares".  Happy for the guys at AP, what a testament to business model of insurance distribution. AP was seeded by PE, sold/re-capped multiple times.  

 

Quote from PE Fund who owned AP press release: "Over the past 13 years, the Company has acquired and successfully integrated over 500 businesses, building a national leader in insurance brokerage. GTCR originally sold the Company to Apax Fund VIII in 2015, and GTCR reacquired a majority stake in partnership with Apax Fund IX in 2019. Today, the business is led by Mr. Henderson and CEO Randy Larsen."

 

I may dive deeper into the numbers but these sky high valuations are incredible.  

I am not a tax lawyer/accountant, but my guess is that the headline price is roughly 20% lower due to tax savings, I am sure that it was a section 382 transaction with asset step-up.

[dwy000]

Is there any reason the industry is taking it on the chin today?  Was there an analyst downgrade of the major players?  I dont normally care about daily moves but this was large and across the board.  Worried i missed some news.  They are all down like 4-5%.

[Xerxes]

1 hour ago, dwy000 said:

Is there any reason the industry is taking it on the chin today?  Was there an analyst downgrade of the major players?  I dont normally care about daily moves but this was large and across the board.  Worried i missed some news.  They are all down like 4-5%.

the industry fell on sympathy for FFH not making it into the index. 

[Junior R]

1 hour ago, Xerxes said:

the industry fell on sympathy for FFH not making it into the index. 

lol

 

2 hours ago, dwy000 said:

Is there any reason the industry is taking it on the chin today?  Was there an analyst downgrade of the major players?  I dont normally care about daily moves but this was large and across the board.  Worried i missed some news.  They are all down like 4-5%.

Many stocks dropped today ....

[longterminvestor]

12 hours ago, Dinar said:

I am not a tax lawyer/accountant, but my guess is that the headline price is roughly 20% lower due to tax savings, I am sure that it was a section 382 transaction with asset step-up.

 

Not an accountant either.  However, they are calling if a deferred tax asset - to the tune of $1B - roughly 7.4% of the purchase price.  Solid edge when you an extra Billion to spend others do not.  See below.  CFO of AJG gets a gold star!  

 

[Spekulatius]

Just a year or two ago, they were stating they were making acquisition at 10-11x and that was before synergies, I think. However that applied to smaller acquisition than this monster here.

 

I do think the BRO edge was their ability to make many plankton size acquisition at lower multiples, similar to what  CSU does in software.

 

Eventually as the whale becomes bigger, living off plankton becomes harder and AJG at least starts to go bigger in the food chain.

[dealraker]

Wells Fargo likes the AJG acquisition:

 

 Equity Research
Price Target Change — December 9, 2024
Insurance Brokers
Arthur J. Gallagher & Co.
Reaffirm Overweight On Accretive AssuredPartners 
Transaction
Overweight
Price Target: $344.00
Our Call
We raise our estimates and price target for AssuredPartners deal. Our EPS estimates 
go up 9.6% in 2025 and 9.2% in 2026 and price target rises to $344 (from $315). The 
expected deal accretion and favorable multiple paid had AJG outperforming peers.
Out year estimates and price target go up: Our 2024 EPS estimate is now $10.03 from 
$10.11 while our 2025 and 2026 estimates go to $12.60 and $14.30, from $11.50 and 
$13.10. The changes to our estimates reflect the incorporation of the AssuredPartners 
transaction as AJG stated on its call there was no other change to its financial condition 
since it last gave guidance. Our price target rises to $344, using a 27x multiple on our 
2025 cash EPS (24x 2026) plus $4 per share for our clean coal DCF.
More thoughts on the multiple paid: Gallagher is paying 14.3x EBITDAC (13.3x when 
adjusting for the $1b DTA with the transaction), which screens favorable to other large 
broker deals (EBITDAC multiples of 20x and above). We think AJG benefited from the PE 
partners looking to monetize the assets (they will be fully out of AP with this transaction) 
and they are also known not to pay up for deals (Gallagher also received a great price 
when buying Willis Re in 2021).
Synergies could be conservative: Gallagher is looking for expense saves of $100m, 5% 
of AP's expenses, which could prove to be conservative in our view (Aon/NFP was a lower 
3.5% of expenses, while MMC did save 15% of expenses with JLT). Further, the revenue 
synergies outlined in the deal ($60m) could be higher as well as they ignored any revenue 
synergies from the Risk Management business as well as on the wholesale side.
Thoughts around owning a broker in the midst of a large deal: While we recognize there 
are often pitfalls to large broker deals, we believe the financials outlined with this deal are 
achievable and the expected accretion as well as low multiple paid has us viewing the deal 
favorable, even against the backdrop of an industry that often sees noise with large deals. 
AJG has a strong track record of integration larger deals stemming from its internaional 
expansion in 2014/2015 and Willis Re.
Valuation post transaction: AJG shares are now trading at 23x 2025 and 20.4x 2026 
EPS estimates, favorable to historical levels given the expected accretion with the deal 
(average P/E is just around 23x). On an EV-to-EBITDA basis shares are at 15.9x 2025 
EBITDA post the equity issuance (and our assumption of $4.5b debt issued with the deal), 
versus the peer group (ex WTW) at 17.3x on average and 17.1x prior to the transaction. 
For additional thoughts see first look note & conference call takes.