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Once a golf-course business, now 18x
The crisis shift
Investors had seen little value in an industry where business was done on the golf course. Then the financial crisis hit, every other financial services industry got hammered, and insurance brokers grew. That put a spotlight on the industry and brought in more competition and more capital.
Size and cheap debt
Size mattered too. Small brokers couldn't drive their commission rates because carriers had no large brokers bringing them books of business. As brokers got bigger, they raised their commission rates with carriers through variable or fixed commissions. Private equity entered, and 20 years of low interest rates made it cheap to borrow and buy.
What buyers see now
Buyers now understand the recurring revenue and the sheer number of acquisition targets, since thousands of brokers remain to be bought. Brokers who sold have even started new businesses after their non-competes ran out.
Why did bigger brokers win higher commission rates?
Carriers compete for access to the books of business that brokers control. A broker placing a large volume of premium with one carrier has leverage a small agency lacks. Carriers reward that volume with higher base commissions and with contingent commissions, which are bonuses tied to volume, growth, and loss results. Contingent commissions are usually calculated and paid after the year ends.
How did cheap debt raise what buyers pay?
Buyout firms finance much of a purchase with borrowed money. When interest rates are low, a company's cash flow can support more debt at the same interest cost. That lets a buyer pay a higher price and still earn the same return on its own equity. Insurance brokers suit this because commissions recur year after year, and lenders prefer predictable cash flow. Lenders often size loans as a multiple of EBITDA.
Why did insurance brokers keep growing in a crisis?
Many types of coverage are required rather than optional. Workers' compensation insurance is mandatory for employers in most US states, and lenders require property insurance on the buildings they finance. Businesses renew those policies whatever the economy does. Brokers are paid a percentage of each premium, so renewals keep producing revenue.
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