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

[longterminvestor]

4 hours ago, dwy000 said:

@longterminvestor are you seeing any real tightening of pricing anywhere these days?  I look at the results of both the insurers, reinsurers and brokers and there seems to be a lot of profitability sloshing around right now.  After years of hardening and price increases way above inflation and now great underwriting results across the board I would have guessed we would be in for a round of softening.  Haven't seen it yet but surely this can't keep up much longer without a ton of new capital coming into the market. 

Pricing has leveled off and terms are starting to get more favorable for clients.  Just had a renewal come in at 15% wind/hail deductible and $10K increase.  I called underwriter and just simply said I could have sold this increase last year but not now, market has changed.  Revised terms came in at 5% named storm with a $19K decrease from expiring (Thats a $29K reduction from where they were and the nuance between a wind/hail and named storm deductible is small but significant).  Everyone is saying if the wind doesn't blow this season, its gonna be a blood bath year end Q4 2024 through Q2 2025 - carriers will really have to compete to keep accounts cause clients are just sick of paying a ton for insurance.  Broker community will make less money however the stress of each renewal will be a relief for the teams - our teams are just so tired of getting the same call from pissed off clients about increases.  The stress of clients shopping will still be in the system but its a different kind of stress than having to go ask a client for 40% increase in premium.  The new stress will be chasing the new market/capital who wants to compete on frothy renewals with some rate in them.  Worrying about a new market popping up and smoking your expiring terms and then having to explain to client why we did not bring them that option, then client thinks brokers are just sitting on their butts collecting commissions.  Really that is just when a new market snipes an account, we all hear about it and then its a copy cat league - you just dont want to be the first one to get smashed by the new carrier quoting.  Gonna be an interesting couple months.  

 

Just got back home from a month away with wife and kids.  good to see the thread is still alive.  

[Spekulatius]

I think the organic growth of insurance brokers is more or less directly linked with how hard the insurance market is. Thats because insurance brokers make a cut on every transition that goes through and a higher renewal is like extra money for them. So I fully expect organic growth to slow down when the insurance  market softens , but I think they may also be able to acquire more brokerage business for lower multiples because the owners might be more compelled to sell.

 

it is interesting that BRO and to a lesser extend AJG have done way less acquisitions in 2023 than in the year before which is probably due to elevated sales multiples and unwillingness to sell. This will likely change when organic growth of these small business is harder to come by.

[longterminvestor]

12 hours ago, Spekulatius said:

I think the organic growth of insurance brokers is more or less directly linked with how hard the insurance market is. Thats because insurance brokers make a cut on every transition that goes through and a higher renewal is like extra money for them. So I fully expect organic growth to slow down when the insurance  market softens , but I think they may also be able to acquire more brokerage business for lower multiples because the owners might be more compelled to sell.

 

it is interesting that BRO and to a lesser extend AJG have done way less acquisitions in 2023 than in the year before which is probably due to elevated sales multiples and unwillingness to sell. This will likely change when organic growth of these small business is harder to come by.

@Spekulatius you are half way there with growth being tied to market cycle, hard or soft, and beneficial to broker organic revenue.  There is another part of that equation that is equally important.  Premium is a function 2 items.  RATE (as you said @Spekulatius) and EXPOSURE (Cost, Payroll, Sales, # of Units, ect).  Unpack for the interested:

 

Year 1 you have a business that does $10M sales and the rate is $5.00 / $1000 of sales, premium will be $50,000 (broker revenue anywhere from 10-15% of premium).  If exposures are flat at Year 2 renewal (Same $10M sales) and the rate increases 30% to $6.50 (the market "hardens" as it has over the past 3 years), premium will be $65,000 (Broker commission is same, does not change).  Lets just say Year 3, the ECONOMY tanks or that particular account lost revenue for whatever reason , AND MARKET SOFTENS, the account's expiring $65,000 premium turns south quick.  BOTH rate and exposure down 20% from $6.5 rate to $5.20 and $10M sales drop to $8M, premium would be $41,600.  This is the real killer to brokers - happened is 2008-2009 - super soft market and exposure were down huge.

 

So put the above in revenue dollars to broker (10% commission for easy math):

YEAR 1: $10M sales at $5.00 rate = $50,000 premium is a $5,000 broker commission

YEAR 2 (exposure flat, market hardens): $10M sales at $6.50 rate = $65,000 premium is a $6,500 broker commission

YEAR 3 (exposure down, market softens): $8M sales at $5.20 rate = $41,600 premium is a $4,160 broker commission

 

Year 1 to Year 2 is a 30% increase in revenue.  Year 2 to Year 3 is a 36% reduction in revenue.  The inverse of the above is what has been happening to brokers over the past 2-3 years, hence revenues just coming in huge quarter after quarter, both RATE and EXPSOSURE have been up (rate more so in property).  

 

This is true for all lines of business sold in the insurance industry, truck fleets have a "cost per unit".  The rate is unit cost and the exposure is number of units on the road, if the business is doing well, they buy trucks and premium goes up, if the business is doing poorly, they sell trucks, and endorse the policy for a credit.  Rate is "LOCKED" for the year, the exposures are "AUDITED" at the end of the year.  Same with payroll for employees, subcontract costs, Health insurance, ect.  Everything in the insurance business has a rate and exposure.  Imagine the games slick clients play with exposures?  ha!  That's a game inside a game.  

 

Brown does an EXCELLENT job of explaining this on the quarterly's, both rate and exposure are part of discussion.  Brown "gets it".  Brown is not alone, others do to - I just know Brown the best.  Investor community LOVES "ORGANIC GROWTH" on the way up however on the way down, read the disclosures - will be interesting to see how management's explain "Lack of Organic Growth".  I will be watching closely.  

 

Last little nugget, just cause I can not help myself, CARRIERS put language in policies called "minimum earned premium" and "Minimum & Deposit".  Language benefits the carrier and hinder client from leaving midterm or getting a credit at audit.  THEY ALSO benefit the broker because the commission for the minimum earned is "locked" as well.  The E&S market loves this kind of language where as the "admitted" market typically has no minimum earned and premiums are not minimum and deposit.  Small nuance and language is buried in 200 pages of the contract that clients (sometimes brokers) do not read.  

 

Regarding Acquisitions, you alluded to same @Spekulatius, my opinion is AJG and BRO are disciplined in valuations and market for acquiring has gone from folding in arbitraged deals to overpaying for deals.  Will be fun to watch as the pool for sellers continues to get smaller driving up valuations for buyers to pay higher multiples - that's what the past has shown us.  Future could be different.  

 

Already shared RYAN buying US Assure for a NOSEBLEED 8.13X REVENUE - $1B on $123M revenue.  This excludes performance bonus up to an additional $400M.  8X revenue is the highest I am aware of ever ever ever.  

Edited August 5 by longterminvestor

[vakilkp]

@longterminvestor - thank you for all of the information you have shared.  1) game within a game - you mention clients perhaps controlling for exposure (reducing trucks, employees etc.).  If the premium is paid annually, is this something during renewal/quoting cycle to minimize next year's costs?  2) your comment re upcoming months - is this from a broker perspective where rate goes down and maybe exposure too?  If so, brokers should come down in price but consolidation may keep a floor on prices of brokerages?  It seems that the bigger and proven ones are to stick with for investment purposes. 

[gfp]

Great post @longterminvestor - thanks as always for the classroom time

[valueseek]

Great post @longterminvestor. Learn a ton from yours posts :).

With the significant increases in rates and exposures in the E&S market, if you have any insights into where we are in the rate/exposure cycle in the E&S market say over the next 12-24 months. And any views you have on the E&S market longer term as well once this cycle normalizes. Thanks.

[longterminvestor]

Will take a all these into one post.

 

Game within the game: clients (and slick brokers) play with exposures to "keep premium" low - its 1 function of the 2 part equation.  Clients do it cause no one has explained rate X exposure conversation or they are "cheating the system".  Carriers see it too cause multiple brokers will submit the same account with different exposures "to get premium down" (imagine that? HA!)  For example, slick brokers cheat by dumping the exposure estimates to get premium down when clients shop and then client figures it out 15 months after they renewed TWICE during the audit for the previous term.  So imagine that, broker dumps exposures to "save account", client is happy cause premium is low, then 12 months later, client renews, then 3 months after that they get an audit notice about the policy term 2 years ago.  seen it many times. Happens less with sophisticated clients because they understand the game.  Some policies are "non-auditable" - those are gold for clients!

 

Any prediction about rate environment is the same exact thing as predicting interest rates.  do you have a gut feel? maybe but no one knows.  its a market based system where new carrier comes into a class to "buy accounts" and drives pricing down, that's also called new capacity to the market.  Inverse is when capacity leaves the market, "lots of buyers, no sellers" ie Hard Market.  

 

Same philosophy with exposure units.  Its based on economy or accounts.  If a broker only has Contractor accounts in their surrounding area, drywall guys, roofers, concrete guys, stucco guys, framers, carpenters, and plumbers/electricians who service new construction and that region has Toll Brothers or Lennar dumping money into new builds, all those accounts will have huge jumps in exposures and premiums will be up big.  Conversely, if Toll Brothers/Lennar shut off new builds for 18 months, those exposure units will fall off cliff and all clients premiums will be down to peanuts for that broker.  Broker will be renewing the same accounts just at 1/10th the price because the contractor has laid off staff and skinned down the business.  Again, economy might be doing fine and booming in other areas however that brokers book is tied to construction in that area - so they are gonna be hurting until construction comes back or that broker figures out how to go after other classes of business.  Think all brokers who have specializations - one might be 100% cannabis niche - that was a move for a while but now seems like its dried up (basically just like capital chasing those classes of business for investment).  AJG has a policy NO CANNABIS accounts - acts kinda like big banks who wont open bank accounts for cannabis.  Back in 2008-2009 Brown got a boast from Wall Street because of the Proctor business (insures bank owned property) - wall street called it "counter cyclical" so while Brown was seeing red, Proctor was booming inside Brown!  

 

Broker book makeup, how diverse or how niched, VERY much goes into valuation of the business from an acquisition standpoint.  Also the carrier diversification, kinda like putting all eggs in one basket.  If that carrier gets downgraded, broker will have to move all the accounts to new markets and that takes time/effort/energy.  Look at US Assure business that RYAN bought, its very much a niche business however its SO NICHE that it gets a boast in valuation.  And its all written up with Zurich.  You might think it would get dinged but no, because its so niched and engrained in how people buy, they basically own the vertical they are in - call it a moat.  They get a boast in multiple. 

 

If both Rate/Exposure go down, only way for broker to stay flat revenue wise would be to sell NET NEW accounts - take an account from someone else.  There really is not a disclosure for NET NEW with public brokers - they all track internally but don't share.  Just look at the brokers revenues for 2008-2009-2010, they are flat to down.  

 

Again, no reason to speculate where market will be - if i knew, I would not tell you, I would tell clients and I would be a god of insurance.  No one knows, they say they do but the don't.  Lets say an AON or Marsh knew, then they would just tell carriers/clients and AON/Marsh would insure the world, and they defiantly do not (they think they do ).

 

The key to being a good broker is to be an advisor to client and help them manage their balance sheet risk with risk transfer insurance that will be there when they need it.  Don't be a transactional broker, be trustworthy and clients will stay.  Price is price and good clients understand the market rates and exposures drive premium spend - can not control either.  If clients sales are up 40% and they have to pay more in premium, they are happy to pay.  Good clients want an insurance company who will stay with them through the cycles and the brokers job is to find THAT carrier fit for THAT particular account - and all accounts have unique individual needs - "there's always something funky" cause if it was vanilla - State Farm would write it.  

 

 

[longterminvestor]

 

AJG has been more active than I thought.  

 

[dealraker]

5 hours ago, longterminvestor said:

 

AJG has been more active than I thought.  

 

Patrick Gallagher is pretty consistent: "We will do well regardless."   That's about as deep as I go for the last 30 years as to detailed understanding of the business.  

Edited August 8 by dealraker

[Spekulatius]

48 minutes ago, dealraker said:

Patrick Gallagher is pretty consistent: "We will do well regardless."   That's about as deep as I go for the last 30 years as to detailed understanding of the business.  

AJG in one presentation from 2022  had a slide that showed that they plan to do transaction at a 10-11x EBITDA multiple. I do think they are paying more now.

 

Its is remarkable how much BRO has slowed down they acquisition spree - they went pretty big in 2021 and 2022.

[longterminvestor]

 

Pretty incredible.  Didn't know where to post, here or the Berkshire threads.  This chart says the entire P&C market is $2.1T including Berkshire @ $1Tish.  The entire P&C market excluding brokers & BRK is $751B.  Putting Brokers at $275B.  So the entire industry is worth $2.1T and a significant part of the value of the industry comes from brokers valued at call it 10% of the industry.  Found that to be awesome and wanted to share.  

 

 

[gfp]

3 hours ago, longterminvestor said:

 

Pretty incredible.  Didn't know where to post, here or the Berkshire threads.  This chart says the entire P&C market is $2.1T including Berkshire @ $1Tish.  The entire P&C market excluding brokers & BRK is $751B.  Putting Brokers at $275B.  So the entire industry is worth $2.1T and a significant part of the value of the industry comes from brokers valued at call it 10% of the industry.  Found that to be awesome and wanted to share.  

 

 

 

Interesting chart.  Is their "P&C Industry" just the US-based non-mutual P&C carriers?  Seems like the "market cap" of State Farm, Allianz, Lloyds, Liberty Mutual, AXA, etc would be pretty big if somehow counted.

[longterminvestor]

Market cap is market cap so would not include mutuals (which really only have value if they are de-mutualized and converted to stock). State Farm and Liberty are mutuals, Axa and Allianz are publicly traded in Europe.  Lloyds is tough to value.  Just saw the chart and thought I would share.  and my math was right, I guess the rounding or something didn't work on the chart.  makes me want to distrust the chart more.  

[dwy000]

While there's obviously a lot of value not captured in the industry market cap due to mutuals and Lloyds type companies, there has to be a similar, or even higher, percentage of value not captured in the brokers number, of which a large proportion are still smaller non-public entities.

 

Which leads to the obvious question of why the brokers are worth so much of the industry vs the companies actually providing the underlying product.  Not to take anything away from the sales channel but boy there's a lot of premium value that's not being seen by the customer.  The margins for brokers are pretty high - and those are probably earned for the initial placement, but is there really a 6-10% value for the purchaser in a renewal?

 

Now that a lot of the insurers have moved the sales channel off their own books, is there a point at which they start pushing back hard on the commissions, especially if underlying pricing is starting to soften?

[longterminvestor]

@dwy000 - "why the brokers are worth so much of the industry vs the companies actually providing the underlying product?"  I asked this same question in previous posts with "what other business models are like this?" - Closest thing I can find is mutual fund sales but now have been obliterated with indexes/ETF's, I guess now that I am thinking about it 2 & 20 as a hedge fund seems pretty close if not exactly what I am asking for!  I still search for other PUBLIC business models where these super interesting market dynamics are in play.  (Help! - want to find!!!).  Here is my answer knowing my incentives as a broker are highly aligned to brokers staying at the top of the insurance food chain:

 

Simple, better business model with reduced volatility.  No capital required to run the broker business.  Brokers own the client relationship.  Look at attached 2013 McKinsey write up where "smart money" explains the carriers want to kill off the brokers and now 11 years later, the brokers have only grown their businesses.  If insurance is the toll road of the American economy, brokers take their percentage of the tolls collected and do not have to put down any capital to build the roads.  In the office we have been talking about relating to selling an account as an act of magic.  It really is magic, your phone rings, you take some notes, call some underwriters, fill out some paper work, get quotes, present your deal, get the order to bind, and boom - you get a check for $100 or $1,000 or $10,000 or $100,000 or more!  and the only risk is losing the client (they could sue you, and clients do, but lets say they just leave and go buy elsewhere).

 

The insurance marketplace system is set up so carriers pay brokers for market access to take risk such that carriers get an upfront premium today in exchange for a promise to pay a claim tomorrow.  The buyer is reducing/eliminating balance sheet risk with a 1 time, fixed premium expense - and they have to re-up in a year - incredible!  Its the carriers who want access to the market of broker represented buyers (insureds) where high commissions/low premiums drive flow into particular markets.  The extra pleasures of the model are the contingents, bonus payouts on loss ratios, guaranteed supplemental commissions, and more.  If insurance companies decided tomorrow to kill off all broker relationships and said "we will only talk to clients, no brokers allowed", the buyers (smart buyers, not all buyers are smart) would pay an insurance expert for negotiation/terms/conditions/fees/language to advise the buyers on the trade and would gladly pay a fee for service directly to the broker, separate and apart from any premium paid to a carrier.  The premiums (and ensuing commissions) on the small, middle market, large commercial transactions (where the money is) are paid with corporate, untaxed dollars.  Its monopoly money.  Buyers want rock solid contracts transferring balance sheet risk to insurance market while demanding excellence from their insurance broker to curate such contracts.  The dynamics are awesome.  

 

Mr. Buffett has told us, "If you are willing to do dumb things in insurance, the world will find you.  You can be in a rowboat in the middle of the Atlantic and just whisper out, “I’m willing to write this,” and then name a dumb price, and you will have brokers swimming to you, with their fins showing, incidentally. It is brutal. I mean, if you are willing to do dumb things, there are people out there, and it’s understandable. But they will find you, and you will get the cash up front.  You will see a lot of cash and you won’t see any losses, and you’ll keep doing it because you won’t see any losses for a little while. So you’ll keep taking on more and more of this, you know, and then the roof will fall in." 

 

That should tell you all you need to know what brokers are willing to do, (Mr. Buffett started with "the world will find you" along the lines of "Praise by name, criticize by category", there's almost a slip of the tongue when Mr. Buffett names brokers later).  The insurance companies seem pretty sure about what they are doing (they hope anyway, gulp) and they also know brokers are grease that make the wheels of risk turn.  INSURANCE NERD ALERT, if a retail carrier has a fixed deductible on a reinsurance deal with unlimited ceded risk, then its the reinsurer thats stupid, not the retail insurer.  People will do dumb things in all businesses, its the brokers job to find the dumb insurance company who whispers a stupid price and bind it for the brokers client.  

 

Here is the video with quote (incidentally BILL ACKMAN asked the question):

 

agents_of_the_future_the_evolution_of_property_and_casualty_insurance_distribution.pdf

[UK]

3 hours ago, longterminvestor said:

@dwy000 - "why the brokers are worth so much of the industry vs the companies actually providing the underlying product?"  I asked this same question in previous posts with "what other business models are like this?" - Closest thing I can find is mutual fund sales but now have been obliterated with indexes/ETF's, I guess now that I am thinking about it 2 & 20 as a hedge fund seems pretty close if not exactly what I am asking for!  I still search for other PUBLIC business models where these super interesting market dynamics are in play.  (Help! - want to find!!!).  Here is my answer knowing my incentives as a broker are highly aligned to brokers staying at the top of the insurance food chain:

 

Simple, better business model with reduced volatility.  No capital required to run the broker business.  Brokers own the client relationship.  Look at attached 2013 McKinsey write up where "smart money" explains the carriers want to kill off the brokers and now 11 years later, the brokers have only grown their businesses.  If insurance is the toll road of the American economy, brokers take their percentage of the tolls collected and do not have to put down any capital to build the roads.  In the office we have been talking about relating to selling an account as an act of magic.  It really is magic, your phone rings, you take some notes, call some underwriters, fill out some paper work, get quotes, present your deal, get the order to bind, and boom - you get a check for $100 or $1,000 or $10,000 or $100,000 or more!  and the only risk is losing the client (they could sue you, and clients do, but lets say they just leave and go buy elsewhere).

 

The insurance marketplace system is set up so carriers pay brokers for market access to take risk such that carriers get an upfront premium today in exchange for a promise to pay a claim tomorrow.  The buyer is reducing/eliminating balance sheet risk with a 1 time, fixed premium expense - and they have to re-up in a year - incredible!  Its the carriers who want access to the market of broker represented buyers (insureds) where high commissions/low premiums drive flow into particular markets.  The extra pleasures of the model are the contingents, bonus payouts on loss ratios, guaranteed supplemental commissions, and more.  If insurance companies decided tomorrow to kill off all broker relationships and said "we will only talk to clients, no brokers allowed", the buyers (smart buyers, not all buyers are smart) would pay an insurance expert for negotiation/terms/conditions/fees/language to advise the buyers on the trade and would gladly pay a fee for service directly to the broker, separate and apart from any premium paid to a carrier.  The premiums (and ensuing commissions) on the small, middle market, large commercial transactions (where the money is) are paid with corporate, untaxed dollars.  Its monopoly money.  Buyers want rock solid contracts transferring balance sheet risk to insurance market while demanding excellence from their insurance broker to curate such contracts.  The dynamics are awesome.  

 

Mr. Buffett has told us, "If you are willing to do dumb things in insurance, the world will find you.  You can be in a rowboat in the middle of the Atlantic and just whisper out, “I’m willing to write this,” and then name a dumb price, and you will have brokers swimming to you, with their fins showing, incidentally. It is brutal. I mean, if you are willing to do dumb things, there are people out there, and it’s understandable. But they will find you, and you will get the cash up front.  You will see a lot of cash and you won’t see any losses, and you’ll keep doing it because you won’t see any losses for a little while. So you’ll keep taking on more and more of this, you know, and then the roof will fall in." 

 

That should tell you all you need to know what brokers are willing to do, (Mr. Buffett started with "the world will find you" along the lines of "Praise by name, criticize by category", there's almost a slip of the tongue when Mr. Buffett names brokers later).  The insurance companies seem pretty sure about what they are doing (they hope anyway, gulp) and they also know brokers are grease that make the wheels of risk turn.  INSURANCE NERD ALERT, if a retail carrier has a fixed deductible on a reinsurance deal with unlimited ceded risk, then its the reinsurer thats stupid, not the retail insurer.  People will do dumb things in all businesses, its the brokers job to find the dumb insurance company who whispers a stupid price and bind it for the brokers client.  

 

Here is the video with quote (incidentally BILL ACKMAN asked the question):

 

agents_of_the_future_the_evolution_of_property_and_casualty_insurance_distribution.pdf 466.24 kB · 1 download

 

This is a great post, thank you!

[thowed]

2 hours ago, UK said:

 

This is a great post, thank you!

 

+1.  Really great to hear from an insider.

 

That's hilarious it was Ackman, and vintage Buffett-speak 'fins showing'.

[dwy000]

9 hours ago, longterminvestor said:

@dwy000 - "why the brokers are worth so much of the industry vs the companies actually providing the underlying product?"  I asked this same question in previous posts with "what other business models are like this?" - Closest thing I can find is mutual fund sales but now have been obliterated with indexes/ETF's, I guess now that I am thinking about it 2 & 20 as a hedge fund seems pretty close if not exactly what I am asking for!  I still search for other PUBLIC business models where these super interesting market dynamics are in play.  (Help! - want to find!!!).  Here is my answer knowing my incentives as a broker are highly aligned to brokers staying at the top of the insurance food chain:

 

Simple, better business model with reduced volatility.  No capital required to run the broker business.  Brokers own the client relationship.  Look at attached 2013 McKinsey write up where "smart money" explains the carriers want to kill off the brokers and now 11 years later, the brokers have only grown their businesses.  If insurance is the toll road of the American economy, brokers take their percentage of the tolls collected and do not have to put down any capital to build the roads.  In the office we have been talking about relating to selling an account as an act of magic.  It really is magic, your phone rings, you take some notes, call some underwriters, fill out some paper work, get quotes, present your deal, get the order to bind, and boom - you get a check for $100 or $1,000 or $10,000 or $100,000 or more!  and the only risk is losing the client (they could sue you, and clients do, but lets say they just leave and go buy elsewhere).

 

The insurance marketplace system is set up so carriers pay brokers for market access to take risk such that carriers get an upfront premium today in exchange for a promise to pay a claim tomorrow.  The buyer is reducing/eliminating balance sheet risk with a 1 time, fixed premium expense - and they have to re-up in a year - incredible!  Its the carriers who want access to the market of broker represented buyers (insureds) where high commissions/low premiums drive flow into particular markets.  The extra pleasures of the model are the contingents, bonus payouts on loss ratios, guaranteed supplemental commissions, and more.  If insurance companies decided tomorrow to kill off all broker relationships and said "we will only talk to clients, no brokers allowed", the buyers (smart buyers, not all buyers are smart) would pay an insurance expert for negotiation/terms/conditions/fees/language to advise the buyers on the trade and would gladly pay a fee for service directly to the broker, separate and apart from any premium paid to a carrier.  The premiums (and ensuing commissions) on the small, middle market, large commercial transactions (where the money is) are paid with corporate, untaxed dollars.  Its monopoly money.  Buyers want rock solid contracts transferring balance sheet risk to insurance market while demanding excellence from their insurance broker to curate such contracts.  The dynamics are awesome.  

 

Mr. Buffett has told us, "If you are willing to do dumb things in insurance, the world will find you.  You can be in a rowboat in the middle of the Atlantic and just whisper out, “I’m willing to write this,” and then name a dumb price, and you will have brokers swimming to you, with their fins showing, incidentally. It is brutal. I mean, if you are willing to do dumb things, there are people out there, and it’s understandable. But they will find you, and you will get the cash up front.  You will see a lot of cash and you won’t see any losses, and you’ll keep doing it because you won’t see any losses for a little while. So you’ll keep taking on more and more of this, you know, and then the roof will fall in." 

 

That should tell you all you need to know what brokers are willing to do, (Mr. Buffett started with "the world will find you" along the lines of "Praise by name, criticize by category", there's almost a slip of the tongue when Mr. Buffett names brokers later).  The insurance companies seem pretty sure about what they are doing (they hope anyway, gulp) and they also know brokers are grease that make the wheels of risk turn.  INSURANCE NERD ALERT, if a retail carrier has a fixed deductible on a reinsurance deal with unlimited ceded risk, then its the reinsurer thats stupid, not the retail insurer.  People will do dumb things in all businesses, its the brokers job to find the dumb insurance company who whispers a stupid price and bind it for the brokers client.  

 

Here is the video with quote (incidentally BILL ACKMAN asked the question):

 

agents_of_the_future_the_evolution_of_property_and_casualty_insurance_distribution.pdf 466.24 kB · 2 downloads

Great response.  

 

This is what makes the brokers such a great business - extraordinarily high ROC, increasingly the only channel to customers, etc.  

 

Which does make me wonder how this continues to be such a market anomaly and what will hurt it in the long run.  I can't think of many broker models that haven't ultimately been reduced to market returns over the past 10-20 years with the recent real estate broker changes tipping over this summer.

 

As Munger said (paraphrasing here) if you have the resources, buying insurance is a dumb financial decision.  And that's true if you think that even with combined ratios of 90-100 the actual insurance payouts are in the 70-80's.  So why is there not more pressure on the fairly high commission expenses for underwriters?  As you point out, taking a phone call, doing some paperwork and cashing a $1000 or $10000 check for it feels like something that should be squeezed hard. Again, as you mention, capital will jump in to grab the quick dollars by underpricing risk so why wouldn't they push as hard to price risk properly and squeeze the "easier money" out of the model.

 

Is it just that insurance is seen as so complicated that buyers are willing to way overpay because they don't understand the true cost?  Surely as pricing softens the commission will get squeezed - especially as brokers chase growth and steal business?  

 

@longterminvestor - I guess what I'm asking is...given the trends from every other broker industry over time, what kills the golden goose here?  Is there something that makes insurance immune to those pressures?

Edited Wednesday at 02:44 PM by dwy000

[Spekulatius]

I think the anomaly will disappear when the market becomes more transparent. I think the insurance co could help, but they are not willing.

Also, insurance is complex and not standardized and clauses matter . I had some friends who had a FEMA clause in their homeowner insurance and it matter big time when their home burned down in Santa Rosa wildfires in 2017. Those without thr clause had often struggled to rebuild their homes with th inflated rebuilding costs ate this distasteful.

 

Then there is the fact that insurance is regulated by state, which means there are 50 different regulations. Thats a large hurdle toward transparency.

 

I do believe this anomaly is going to be with us for a while.

Edited Thursday at 10:00 PM by Spekulatius

[UK]

5 hours ago, Spekulatius said:

I do believe this anomaly is going to be with us for a while.

 

I believe it will be the case also. Insurance is just too complex and dealing with several contacts every time you need something is very inconvienent and time consuming. They also are better experts for the details. All brokers have to do to provide the value is to serve their clients a tad better than insurers themselves, which in my expierence is not a very hard thing to do. In my mind the main problem for the aspiring owners of brokerage companies is how to buy them more cheaply though:)

[dealraker]

7 hours ago, UK said:

 

I believe it will be the case also. Insurance is just too complex and dealing with several contacts every time you need something is very inconvienent and time consuming. They also are better experts for the details. All brokers have to do to provide the value is to serve their clients a tad better than insurers themselves, which in my expierence is not a very hard thing to do. In my mind the main problem for the aspiring owners of brokerage companies is how to buy them more cheaply though:)

And this last sentence from UK says it all.  The conversation we've had here, both as to understanding the business and wondering as I do constantly why disruption hasn't arrived, would be the same if we had this discussion 30 years ago.  

 

Since this nearly 2 year old topic was introduced the brokers are up in price, some more than 40%.  They are too expensive to buy of course, or the ones that may not be aren't the good performers.  I had added WTW and BRP (now BWIN) a year ago or so and didn't like much about BWIN so I sold it.  WTW too isn't the quality of BRO or AJG, but is too up 45% in a year or so and still not expensive vs a typical business with its growth of earnings.

 

And of course the one I sold...BWIN?  It is up about 100%.  I am a great investor aren't I?   The stock, of course, was and is TOO expensive!  

 

My next door neighbor, like many my age, was in to drugs and music along with a big time social focus throughout his late teens until mid 30's.  He went into his dad's insurance agency business.  By 40 he was actually working steady.  He retired in his 50's and has been traveling since, and he travels everywhere without any financial concerns.  His father is still living so he's doing all this lifestyle via his earnings.

 

Ain't fair is it?  As I say as to insurance investing: Generally what is...is what will be.

Edited Thursday at 10:56 AM by dealraker

[UK]

36 minutes ago, dealraker said:

And this last sentence from UK says it all.  The conversation we've had here, both as to understanding the business and wondering as I do constantly why disruption hasn't arrived, would be the same if we had this discussion 30 years ago.  

 

Since this nearly 2 year old topic was introduced the brokers are up in price, some more than 40%.  They are too expensive to buy of course, or the ones that may not be aren't the good performers.  I had added WTW and BRP (now BWIN) a year ago or so and didn't like much about BWIN so I sold it.  WTW too isn't the quality of BRO or AJG, but is too up 45% in a year or so and still not expensive vs a typical business with its growth of earnings.

 

And of course the one I sold...BWIN?  It is up about 100%.  I am a great investor aren't I?   The stock, of course, was and is TOO expensive!  

 

My next door neighbor, like many my age, was in to drugs and music along with a big time social focus throughout his late teens until mid 30's.  He went into his dad's insurance agency business.  By 40 he was actually working steady.  He retired in his 50's and has been traveling since, and he travels everywhere without any financial concerns.  His father is still living so he's doing all this lifestyle via his earnings.

 

Ain't fair is it?  As I say as to insurance investing: Generally what is...is what will be.

 

Dealraker, if in some parallel universe, you were new to a sudden wealth, by say winning a 10 M in a lottery and this sum being your only family asset, how much of it you would put into AJG and/or some other brokerages under conditions and alternatives as of today, given your knowledge and long time experience? I am not sure this question is very fair, but would appreciate your thoughts, if you would share any:)

 

Edited Thursday at 11:27 AM by UK

[coffeecaninvestor]

I work as an underwriter for a large health insurer so we deal with brokers all the time. It’s always amazed me how much they get paid, and how the situation still exists what seems like lazy work by them. I do think the product is complex enough that most CFO/CEO/HR don’t want to deal with it. Especially when they go to market the process is chaotic with requests for data, spreading all the bids, most large brokers have huge questionnaires and in some cases their own online portals to aggregate all the data. It is not an efficient process for someone to do. Some carriers will play games and try to hide costs so being able to identify that when spreading bids is important as well. The implementation process is also a nightmare so the broker and account manager work closely together because usually the sale happened because the broker stuck their neck out to move the business to a new carrier when the easiest thing to is stay with the current carrier. The relationship part is more important. It’s all a big game, and some are better at playing it than others. I can’t tell you how many bids that I’ve sent out where we’d save them millions and they don’t move to us. We only close 5-10% of the quotes we send out. It’s not always the relationship between the decision maker and broker typically it could be between the HR person who has to do the day to day dirty work. I don’t see anything changing as long as the current dynamics exist. The whole industry would have to be disrupted which is hard to do as you can see from the Amazon/BRK/JPM thing that failed awhile back. 

[dealraker]

As the Allman Brothers, Dickie Betts actually, sang, "I was born a rambling man."  To me these right brained ramblings are often the most thoughtful (especially when it isn't me writing) and productive parts of a forum.  If you think I discount too heavily the data and detailed posts, ones such as Spekulatis often puts up, that's not at all correct- I view his posts highly.  But general thinking is very productive especially when you plug in probability in a sane manner.

 

But in the end, at some point, you have to "man-up" (read being silly) and ante up a stock outlay to benefit from whatever you understand...or maybe accept that you only partially understand it...and this is to me what you have to accept in the insurance business - that you really do not have the capability to wrap it up entirely.  It is a sector where you play the odds, and in my view that's exactly what Warren Buffett has done his entire life better than others.

 

Buffett quotes, I think but am not sure that John Train put them in The Midas Touch: "The insurance brokerage business is a toll booth on the world economy....we made a mistake going in to underwriting...the brokerage side is a better business."  Most of you are of course already aware of those words.

 

As I've previously written I got into the brokers in 1994.  I was incredibly lucky to have connections with my constant friend, a guy named Mark Breeden, from Lexington, NC.  Mark was 5-6 years younger, he's 64, than me, but he too was a tennis player.  Today he owns what is likely a near 100 mil business, a guy who went to work - not college - at 18.  But oh what a businessman he is.  And......here's the important part at least from me: I got, and get, to watch him and his business!  And one of the reasons I've not sold my insurance brokers is because of this view of Breeden Insurance, its phenomenal growth and profitability.  

 

So the stock analyst says "this broker is a buy today"...and "it is sell at this price."   And I reply, "Mark didn't sell, so I'm not selling."  100 baggers later who has won?  The analyst isn't going to tell you, he's off recommending something else..  But Roby Leonard, the seemingly always "old simple minded" man in my investment club who gave away millions in his life after investing from his small snack food business's, once told me: "Charlie, you can't make up with new ideas the loss you get from selling a good business."  Roby understood the investment process, his question to me often was so stupidly simple: "Is this a good stock to buy?"  Lord help us...oh my!

 

So in 1994 when I got into the builders supply business and Jerry asked that I be a part of the investment (we'd sold 4 builders supply businesses and kept one and bought a mill work business) committee.  We bought Brown and Brown at that meeting from my recommendation.  Basically we do not sell stocks from this portfolio as we always have more money coming in than going out.  We did convert to supchapter s along the way as our portfolio is insanely too large for a business of this type.  My family, the other owners, have been impressed LOL.

 

And then the story I've told before, the other guy - my family - in this business asked me to "allocate" 800k of his retirement account (he's older than me by 7 years) at some point along the way.  Brown and Brown (might still have been Poe and Brown then) was trading reasonable while it seemed to me the market wasn't, so I said, "The probability of losing or doing poorly if you put it all in BRO is so low I don't think it registers Steve---- so I'd put it all in Brown and Brown."  He did.

 

100% probability the brokers will sell off to historically at least average prices.  My guess is it won't be too long a wait for this.  A good question to ask yourself is whether you'll be willing to invest given the industry chant at that time - which likely will be less positive than today.  

 

I was born a rambling man obviously.

 

 

Edited Thursday at 11:43 AM by dealraker

[dealraker]

25 minutes ago, UK said:

 

Dealraker, if in some parallel universe, you were new to a sudden wealth, by say winning a 10 M in a lottery and this sum being your only family asset, how much of it you would put into AJG and/or some other brokerages under conditions and alternatives as of today, given your knowledge and long time experience? I am not sure this question is very fair, but would appreciate your thoughts, if you would share any:)

 

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.  

 

 

 

Edited Thursday at 11:51 AM by dealraker