Business Breakdowns
· 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.
· Matt Reustle, Aaron Cohen
[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. [00:00:00] S1: Well, it's interesting Matt, on that topic. There are players in this industry that don't push organic growth and the flip side is they have higher margins because they're not investing in producers, they're not investing in go-to-market. So this industry, while it's a wonderful, wonderful industry, competitors look very similar until you really dig deep and you can look at a competitor and look at their EBITDA margins and pretty much guess what their organic growth is. [00:00:00] S0: Yeah, makes those ROIC look better with those margins, at least in the short term. [00:00:00] S1: Mhm. [00:00:00] S0: On the scale point, I think it comes with a lot of things. I think earlier on you mentioned it should be able to get you better whether it's pricing or there should be some economies of scale with the carriers. Does that tend to show up in terms of the offering that they can provide to customers? And how meaningful is that in terms of driving a difference that shows up in results?
· Aaron Cohen, Matt Reustle
[00:00:00] S1: It all depends on size. And I've looked at insurance brokers with a few hundred thousand dollars of EBITDA, not even revenue. And I've looked at insurance brokers with hundreds of millions of dollars of EBITDA. I would say what's important on the scale side is those small brokers, they don't have access to all the markets. Markets, another term for the carriers that a large broker would have, because if they don't have a lot of volume, a lot of the carriers don't even want to talk to them. They don't want to spend time quoting their business. So I think as you grow, it brings you more optionality and access to more markets and hopefully better terms and better pricing for your customer. So I think that's where size does matter. And I don't think there's a perfect threshold of what size you have to be to be able to have access to the markets. It all depends on your end market that you're writing, your customer size, et cetera. So that's how I think about size relative to access. But I think once you're an established business, you have $100 million plus of revenue, you will be able to access all the markets that you'll need to be able to get the best product for your customer. [00:00:00] S0: Early on, you mentioned the adoption or incorporation of technology into the system. How is that showing up? Where does it show up? And what difference does the technology make for the business?