The general insurance brokers an interesting group. Their principal assets are in their employee base and their client relationships, as is the case with other service companies such as investment bankers, accountants, lawyers and consultants. They do not require a great deal of capital, although their investment in technology is ever increasing.
They rely on acquisition of other brokers to varying degrees, resulting in significantly different levels of depreciation and acquisition expenses tending to create different levels of net profitability. Sometimes they acquire with stock and sometimes with cash which further complicates comparison. They also rely to widely varying degrees on leasing versus purchase for office equipment. To create a level basis of comparison, it may make more sense to review them in terms of Enterprise Value to EBITDA. That tends to normalize for different proportions of debt and acquisition related expenses.
The larger, more mature brokerages generally must rely relatively more on internal “organic” growth than smaller, less mature brokerages that can grow rapidly through acquisition in new territories or by “roll-up” of agencies in the proximity of their established offices.
Price-to-Book is generally not a useful value indicator for brokers. Price-to-Sales has some value to the degree the revenue sources are similar. Hilb Rogal & Hobbs (HRH), Brown & Brown (NYSE:BRO), Hub International Group (HBG) and USI Holdings (USIH) have the most similar revenue sources. Marsh & McLennan Companies, Inc. (NYSE:MMC) is the most dissimilar to the others with large revenue contributions from non-insurance broking lines.
These excerpts from a recent Dow Jones article comment on the impact of the current “soft” insurance market and regulatory changes on near term broker results:
“The softening insurance market is likely to hold back revenue growth for the largest insurance brokers, but earnings will still grow overall next year due to cost-cutting and possible share buybacks, and "soft market"[weak pricing power for insurance].
Risk managers at Fortune 1000 companies are more likely to shop insurance brokers than in years past due to greater regulatory scrutiny. That creates opportunities for other brokers to make a play for the large accounts.
"When you look at Willis [Group Holdings] (WSH), I think you can really see the selling culture," Bear Stearns analyst David Small said. "Willis's producers generate more revenue per employee" than Marsh & McLennan, the largest broker.
Fourth-largest broker Gallagher (GLH) has some advantage over larger competitors because the Itasca, Ill., broker is the only one of the top four brokers that is allowed to continue to accept so-called contingent commissions earned by smaller brokers it acquires. Hilb Rogal & Hobbs is also able to accept contingent commissions, but is much smaller than Gallagher.
Contingent commissions, which are paid by insurers to brokers who bring them business, still make up a significant percentage of revenue for smaller brokers, said Small.
After an investigation into the practice by New York Attorney General Eliot Spitzer, the largest brokers all agreed to give up the commissions.”
We see Marsh & McLennan Companies, Inc. (MMC) as a turnaround-restructuring story. We see Arthur J. Gallagher & Co. (NYSE:AJG) as a dividend income growth story. We see Brown & Brown, Inc. (BRO) and Hub International Group (HBG) as domestic earnings growth stories. We see Willis Group Holdings Limited (WSH) as a global risk broker story for multinational businesses and domestic businesses abroad. The group is not particularly attractive at the moment.
They have operations in property-casualty brokerage and consulting, risk consulting and technology through its Kroll unit, reinsurance through its Guy Carpenter unit, investment management through its Putnam unit, and employee benefits and human resource consulting through its Mercer unit.
The brokerage side of the company was a focal point with AIG in a commission scandal and the Putnam side of the company was a focal point in a mutual funds investment timing scandal. Those issues are put to bed legally, but the fallout in terms of operations is not fully behind them.
They have explored selling the Putnam asset management unit and most likely will do so when market conditions are right, as that line is least similar to the other lines of business and could probably benefit from a “fresh start” by joining another asset manager.
Willis Group Holdings (WSH) is a large globally capable insurance broker and risk management advisor based in London with revenue of approximately $2.3 billion, 15,000 employees in 150 offices in 100 countries, including the key countries of China, Russia, India, and Brazil. Like MMC, they have the capacity to handle risk for international trade and domestic risks around the world.
Hilb Rogal & Hobbs (HRH) is the eighth largest insurance broker in the United States based in Virginia, with revenue of approximately $700 million, and over 120 offices throughout the United States and London. They are quite active as an acquirer of other insurance agencies and brokerages. They were recently involved in a market conduct matter with the State of Connecticut and settled the matter for $30 million.
Brown & Brown (BRO) is principally a property-casualty insurance broker based in Florida with revenue of approximately $900 million. They have 170 offices in 34 states, most heavily concentrated in CA, FL, GA, NJ, NY, and WA. They have an excess & surplus lines managing agency business sold through their own offices and independent retail agents and brokers.
Hub International Group (HBG) is based in Chicago with revenue of approximately $500 million and approximately 3,300 employees in 200 offices in the USA and Canada. Their IPO was in 2002 and their rate of acquisitions has been rapid.
Arthur J. Gallagher (AJG) is a large insurance broker with clients in over 100 countries through company offices in 7 countries [principally the English speaking countries of USA, UK, Australia and Bermuda], and correspondent broker relationships for other countries. They have revenues of approximately $1.5 billion, and over 8,000 employees.
USI Holdings (USIH) based in Briarcliff Manor, NY employing approximately 2,800 people, and with revenues of approximately $500 million is the 9th largest insurance broker in the US. They have a more balanced mix of property-casualty and employee benefits business than most large US brokers. Their 70+ offices in 24 states employ approximately 2,900 people. They are also growing rapidly by acquisition.
Disclosure: As of this writing the author has a position in AJG and WSH, and has an historical relationship with HRH as a former vendor, a current personal insurance customer and a long-term acquaintance of the CEO.