Business Breakdowns
· Matt Reustle, Aaron Cohen
[00:00:00] S0: And when you think about that specialization and how it would translate to the bigger businesses, maybe the acquirers of businesses. In your mind, is the ideal insurance brokerage one with several segments each with their specialists in those categories, or is it pure play where it's a business and while it might have scale, it's specialized in one specific line or insurance type? [00:00:00] S1: You know, Matt, what's funny is I joke internally at GTCR. I love insurance brokerage because of one word: diversification. And I mean that across every aspect of this business. Insurance brokerage, you need to be diversified across carriers, you need to be diversified across customers, you need to be diversified across producers, and you need to be diversified across end markets. So you can have multiple specialization focus within one broker. And I think that builds a better, more sustainable business. [00:00:00] S0: When you are stepping into an insurance brokerage business and you're thinking about laying out the plan of attack, can you talk a little bit about if there is a playbook or if there is a strategy ranking what you're typically looking to do alongside that leader that you're either putting in place or that is already there?
· Aaron Cohen
[00:00:00] S1: So I'm going to go back to the last question, which used the word diversification. We don't want to invest in an insurance broker that is highly dependent on one carrier or one broker. You'll see that a lot, especially in the small acquisitions we've done in the past where two or three brokers basically are the entire business. They own all the customer relationships. Then you're just reliant on those people. And the question really becomes: who owns the business? Is it you or the broker who owns the customer relationship? So we want some level of diversification. Number two, I'd say we're looking for some basic centralized infrastructure. They have the right agency management system, they have the appropriate technology to support the brokers. We'll invest in that. But if you're looking at a specific broker, you want them to have that. And then most importantly, it's all about the people. This is a business where we don't have machines making widgets. We have people, human beings with emotion and personal lives who have to go out and satisfy our existing customers and win new customers every single day. And you need to have great leaders who understand that and know how to work and partner with the brokers and the entire organization to be able to drive success. Because if a broker's unhappy with his job or something's going on in his life, we all have had good days and bad days. Machines don't have emotion. It's wonderful. They just keep on plowing along. But here it's all about having CEOs and regional leaders who have great EQ and could partner with their sales folks and people in the market to be able to drive business.
· Matt Reustle
[00:00:00] S0: As you think about the competition, I think what you mentioned in terms of operating the business, the importance of the people involved all the way down from the top to the producers, that stands out when they're actually out there looking to make the sales. What does competition actually look like and how fierce is that? When you're thinking about whether it's maintaining the retention rates are quite impressive, but not just maintaining, actually growing the business. What comes into play with the business model in terms of just winning more business in the future?
· Aaron Cohen
[00:00:00] S1: There is a tremendous amount of competition in this industry. As you could go through the list of the top 20 insurance brokers, they're probably all billion dollar plus companies. So there's a tremendous amount of competition. That being said, as you mentioned, retention is very, very strong in this industry. And the irony is this is an industry and I've never seen any other industry like this. We don't set our price, so our customers are not shopping the insurance broker's price. Sometimes they're shopping the carrier's price, which if you're doing your job as an insurance broker, you're giving multiple options to your customer and finding them the best price. So it's an industry where you don't set your price and your customers don't shop your price. So the irony is in the industry where there's what we call hard and soft markets. Hard markets are rising rates, rising premiums for a bunch of reasons we could talk about if you want, or soft market, when rates are coming down. In a rising rate environment, in a hard market is a lot of times when you see some attrition, because even though you're getting the best rate for your customer, if their rate went up 15%, even though you've gotten them five quotes from the five largest and most respected insurance carriers out there, they just feel like they need to shop it. And that's when you see some attrition, even though it's outside the control of the broker. And a lot of times they're not going to get a better price from someone else. But sometimes you just feel like they want to see that change. So it's something very unique in this industry that you don't see in many others. The other thing I'd say is where we've seen retention grow and organic growth accelerate is once we buy some of these acquisitions, a lot of times people say you buy the founder out, they're done. You see growth slow. We've actually seen the inverse because what we've seen is we'll buy out a founder. A lot of times that founder will roll a significant amount of their proceeds into our business. Assured Partners is the most recent one. And then they're freed up to be able to go out and grow their business and not have the handcuffs of dealing with all the corporate stuff. But then most importantly, they get access to our center of excellence.
· Aaron Cohen, Matt Reustle
So you buy a broker in Green Bay who's focused on farming and commercial transportation and all of a sudden they're going to get a nationwide network of experts to be able to help educate their clients and get them even better coverage. So it's a really interesting industry in that way. [00:00:00] S0: Absolutely. And to ask a similar question, but slightly differently, when you're thinking about the investment opportunity, is market share growth or the capturing of additional market share through organic expansion and capturing of that share core to the thesis, or could you underwrite some of these just based on maintaining market share within a growing pie going forward? If you could separate those two. I'm just trying to capture the understanding of how important that is to capture more and more of the industry organically versus doing it through M&A or just capturing the tailwind in the market.
· Matt Reustle, Aaron Cohen
[00:00:00] S0: Absolutely. And to ask a similar question, but slightly differently, when you're thinking about the investment opportunity, is market share growth or the capturing of additional market share through organic expansion and capturing of that share core to the thesis, or could you underwrite some of these just based on maintaining market share within a growing pie going forward? If you could separate those two. I'm just trying to capture the understanding of how important that is to capture more and more of the industry organically versus doing it through M&A or just capturing the tailwind in the market. [00:00:00] S1: Most importantly, if you want to grow your pie and increase your market share, that will drive premium valuations on the exit. This industry, as we've discussed and as you read research on the large public companies, everyone focuses on two growth stats: total growth, which includes M&A, and organic growth. And organic growth is what drives those wonderful valuations. So for us, when you find the great CEO who can absolutely drive organic growth, but understand and execute M&A, that's a win-win. That being said, to your question, you have seen insurance brokers be very successful by growing with inflation for lack of a better term and driving a lot of value creation through M&A. The best success stories do them both. [00:00:00] S0: Yep. Constellation Software, completely different industry, but not much focus on organic growth historically there and they've done quite all right just riding the tailwinds.