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

[valueventures]

https://cdn.hl.com/pdf/2024/q2-2024-insurance-brokerage-market-update.pdf

[dealraker]

34 minutes ago, valueventures said:

https://cdn.hl.com/pdf/2024/q2-2024-insurance-brokerage-market-update.pdf

Certainly gives clarity as to how aggressive AJG is towards acquisitions.  

[dwy000]

@longterminvestor, what are your thoughts on AJG buying Woodruff Sawyer?  Paying $1.2bn plus $150m in acquisition costs and retention bonuses seems crazy expensive for a company with $88m of EBITDAC.  Is this indicative of valuations or is Woodruff a one off at this value?

[longterminvestor]

The valuations paid on basic metrics for Woodruff Sawyer, as eye popping as they look, are less than what AJG paid for Assured Partners (AP).  AP is 3X the size of Woodruff rev wise tho.  The AP transaction plays a part because AJG raised cash by selling stock to pay $13.45B for AP.  AJG exercised an "over allotment" clause in the stock offering and received an extra $1.28B in early Jan '25.  

 

Either the purchase of Woodruff was all part of the plan or the amounts curiously align and AJG had an extra $1.2B laying around burning a hole in their pocket to buy Woodruff - either way - Insurance Brokerage acquisition valuations have been and continue to stay high.  There are other notable transactions where the valuations were richer than AP & Woodruff.  For example, AON paid $13.4B for NFP's $2.2B revenue in 2024 - worked out to 15X EBITDA.  AJG paid 14.3X and 13.6X (rough math) for AP & Woodruff respectively.  

 

There are 40+ REAL buyers of insurance brokers - all competing to acquire revenue from a seller.  That's a recipe for elevated multiples.  Its unlike anything I have seen in other sectors - fascinating to watch.

[Spekulatius]

On 3/5/2025 at 2:13 PM, longterminvestor said:

The valuations paid on basic metrics for Woodruff Sawyer, as eye popping as they look, are less than what AJG paid for Assured Partners (AP).  AP is 3X the size of Woodruff rev wise tho.  The AP transaction plays a part because AJG raised cash by selling stock to pay $13.45B for AP.  AJG exercised an "over allotment" clause in the stock offering and received an extra $1.28B in early Jan '25.  

 

Either the purchase of Woodruff was all part of the plan or the amounts curiously align and AJG had an extra $1.2B laying around burning a hole in their pocket to buy Woodruff - either way - Insurance Brokerage acquisition valuations have been and continue to stay high.  There are other notable transactions where the valuations were richer than AP & Woodruff.  For example, AON paid $13.4B for NFP's $2.2B revenue in 2024 - worked out to 15X EBITDA.  AJG paid 14.3X and 13.6X (rough math) for AP & Woodruff respectively.  

 

There are 40+ REAL buyers of insurance brokers - all competing to acquire revenue from a seller.  That's a recipe for elevated multiples.  Its unlike anything I have seen in other sectors - fascinating to watch.

It is still noteworthy what AJG paid because just ~1.5 years ago, they mentioned they plan to pay 10-11x EBITDA for acquisitions. So there is valuation creep going on.

 

Maybe they meant small bolt ons, because larger acquisitions for sure aren’t available at these 10-11 x multiples.

[valueventures]

I'd love to get into this space, but it's been a challenge given the valuations...

 

With the market pull-back, curious if anyone has been starting / adding to their exposure? What valuation is fair / attractive for the BROs and AJGs of the world? Will valuations compress once the hard market ends, or are insurance brokers less exposed since they're not underwriting the insurance? Thanks!

[tnathan]

Valuations will compress eventually ... but why are you trying to allocate today? There's better r/r out there

[dealraker]

4 hours ago, tnathan said:

Valuations will compress eventually ... but why are you trying to allocate today? There's better r/r out there

Not at all sure I'd agree with the above as I think many brokers are far and beyond better than average as to overall business models.  Yet I'd be patient for better entry points that will surely come at some point.  For the last multiple decades brokers have been clearly one of the lowest risk business models.

 

 

Edited April 6, 2025 by dealraker

[dealraker]

This morning I added to WTW and AON.  Flush with cash and cash-to-come from a real estate deal closing next week, I added significantly to WTW just below $300 and AON just below $330.

 

 

[dwy000]

12 minutes ago, dealraker said:

This morning I added to WTW and AON.  Flush with cash and cash-to-come from a real estate deal closing next week, I added significantly to WTW just below $300 and AON just below $330.

 

 

Might be good timing. Aon especially taking it on the chin today down 10% but the whole industry took a 5% whack this morning. Still valued at crazy multiples but less crazy than 3 months ago. 

[thowed]

Everything down - presuming this is just down to disappointing AON results, which I am now going to read.

[Spekulatius]

BRO results are out today too and they seem a bit light. Same with ERIE last week. It seems that the insurance market is slowing down and that’s why we are seeing the misses here and there.

https://investor.bbrown.com/news-releases/news-release-details/brown-brown-inc-announces-first-quarter-2025-results-including

[dwy000]

19 hours ago, Spekulatius said:

BRO results are out today too and they seem a bit light. Same with ERIE last week. It seems that the insurance market is slowing down and that’s why we are seeing the misses here and there.

https://investor.bbrown.com/news-releases/news-release-details/brown-brown-inc-announces-first-quarter-2025-results-including

Used the drop today to finally get off my ass and buy some BRO.  It's still a higher multiple than I'm comfortable with but I watched from the sidelines since the $60's and kicked myself every time it went up.  Will revisit in about a decade and see how it went. 

[Rainier]

5 hours ago, dwy000 said:

Used the drop today to finally get off my ass and buy some BRO.  It's still a higher multiple than I'm comfortable with but I watched from the sidelines since the $60's and kicked myself every time it went up.  Will revisit in about a decade and see how it went. 

Same for me. I love the businesses and have been reading (and appreciating) dealeaker’s commentary on these names for a while now. They’re just so expensive. Finally bit the bullet.

 

Bought a sizable (for me) basket position of WTW, AON, GSHD, and ERIE over the last few days.

[Dinar]

1 hour ago, Rainier said:

Same for me. I love the businesses and have been reading (and appreciating) dealeaker’s commentary on these names for a while now. They’re just so expensive. Finally bit the bullet.

 

Bought a sizable (for me) basket position of WTW, AON, GSHD, and ERIE over the last few days.

There is a short case on Erie by Herb Greenberg, you should look into it.  

[Rainier]

44 minutes ago, Dinar said:

There is a short case on Erie by Herb Greenberg, you should look into it.  

Thanks for the heads up on that. I hadn’t heard about it. His blog posts all seem to be behind a paywall? Is the short thesis based on accounting issues or something else?

[dealraker]

9 hours ago, Dinar said:

There is a short case on Erie by Herb Greenberg, you should look into it.  

A brief summary of the negative view of Erie.  Seems pretty logical that something must change.

 

https://www.sprucepointcap.com/research/erie-indemnity-company

[Rainier]

2 hours ago, dealraker said:

A brief summary of the negative view of Erie.  Seems pretty logical that something must change.

 

https://www.sprucepointcap.com/research/erie-indemnity-company

Thanks!

[Castanza]

19 hours ago, dwy000 said:

Used the drop today to finally get off my ass and buy some BRO.  It's still a higher multiple than I'm comfortable with but I watched from the sidelines since the $60's and kicked myself every time it went up.  Will revisit in about a decade and see how it went. 

 

BRO is one of those companies that's aways expensive. 

[dwy000]

1 minute ago, Castanza said:

 

BRO is one of those companies that's aways expensive. 

Yup.  All of the brokers are.  It grates on the value investors in me to pay over 25x for anything unless it's growing 20%+. But this is also one of the highest ROE industries out there (software aside) and continues to both grow and consolidate.

 

While insurance pricing and rates will inevitably get squeezed, this is one industry where inflation is kind of your friend since the take rate is a % of premiums. 

[dealraker]

31 minutes ago, dwy000 said:

Yup.  All of the brokers are.  It grates on the value investors in me to pay over 25x for anything unless it's growing 20%+. But this is also one of the highest ROE industries out there (software aside) and continues to both grow and consolidate.

 

While insurance pricing and rates will inevitably get squeezed, this is one industry where inflation is kind of your friend since the take rate is a % of premiums. 

I think it was March of 2023 or so and here we were discussing the brokers and their expensive levels.  I mentioned that I'd been put in charge of a family trust for a few years, that I was putting 25% of the money in AJG and 75% or so (I don't know if I mentioned percentages or not) in Berk.  AJG was $185 and Berk was a bit over $300.

 

Both turned out well so far but buying AJG did not "feel" good at all, it was very expensive in my head compared to Berk -and Berk seemed a good buy to me.  Turns out AJG probably wasn't expensive and that's sort of the picture that repeatedly slaps me upside the head...that the brokers aren't as expensive as we think.

 

Of course I'm especially tainted in that in the 1994 era when I got invested in the brokers the PE's were far lower than what's developed since then.  I'm not sure, other than some major industry change or crisis, that we can expect those prices to return.

[dealraker]

1 hour ago, Rainier said:

Thanks!

Keep in mind I've owned Erie for a while.  I am literally clueless on the business model, I've not been able to get my brain to figure it out.  I consider Erie sort of an outlier from the brokers, somewhat similar but way different too.  My former business partner who runs a business that primarily uses Erie is the only reason I bought Erie.  It was his idea and he's done so well in the insurance business it simply astounds me.  

[Rainier]

9 minutes ago, dealraker said:

Keep in mind I've owned Erie for a while.  I am literally clueless on the business model, I've not been able to get my brain to figure it out.  I consider Erie sort of an outlier from the brokers, somewhat similar but way different too.  My former business partner who runs a business that primarily uses Erie is the only reason I bought Erie.  It was his idea and he's done so well in the insurance business it simply astounds me.  

Thank you. I read an overview of the business model last week and looked at the last couple of annual reports. It kind of seemed like a captive broker (i.e. the Erie Exchange policyholders are forced into a fee with ERIE). I assumed the publicly traded ERIE was setup by Erie exchange management at some point as a way to profit from the policy writing since the insurance company is some kind of co op owned by the policy holders. But now maybe the sustainability of the 25% fee is in question due to policy losses.

 

I appreciate you and Dinar bringing it up. I sold this morning and I’ll watch it for a while. It still sounds like a good business model, but the fee has to be sustainable. 

[dealraker]

33 minutes ago, Rainier said:

Thank you. I read an overview of the business model last week and looked at the last couple of annual reports. It kind of seemed like a captive broker (i.e. the Erie Exchange policyholders are forced into a fee with ERIE). I assumed the publicly traded ERIE was setup by Erie exchange management at some point as a way to profit from the policy writing since the insurance company is some kind of co op owned by the policy holders. But now maybe the sustainability of the 25% fee is in question due to policy losses.

 

I appreciate you and Dinar bringing it up. I sold this morning and I’ll watch it for a while. It still sounds like a good business model, but the fee has to be sustainable. 

Yes.

[Spekulatius]

I would be careful with ERIE. the total combined ratio business they wrote on the exchange is pretty bad. They shows this data only in the supplements This is probably not sustainable. ERIE either need to be more selective in underwriting or lowering  ERIE‘s 25% fee or both. In any case, ERIE‘s results will suffer.

 

ERIE is a great business as they are not directly underwrite the risk and just charging fees proportional to the volumes. It‘s similar to the GP/LP structure.