Business Breakdowns
· 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?
· Aaron Cohen
[00:00:00] S1: Sure, I like to make the joke, but I don't think I'm joking. People say financial services is about five or 10 years behind the rest of the world in terms of adopting technology. I think that's right, but I think insurance and insurance brokerage is probably 10 to 15 years behind now. We're coming up pretty quickly, but there are a bunch of different areas where technology helps. First, most importantly, is having one agency management system across the organization. An agency management system—think of that as the ERP system where the brokers live in. They put potential clients in there. That's where they run all their processing, underwriting, acceptance, claims management, et cetera. In order to have one agency management system across your organization allows you to see your organization fully, understand what type of policies you're writing, what type of risks you're putting with what carriers. And you can have the data at your hands to be able to drive better negotiations with the carriers. But then it also helps the brokers. There are a tremendous amount of filings because this industry is regulated state by state. So the brokers need to have the technology to be able to quickly fill out forms and be able to submit them to the appropriate entities or the carriers to be able to do their jobs efficiently and sell more business. There's a lot of brokers out there, they're still using pen and paper. And then if you overlay the technology with AI, it should be able to allow brokers to have much, much more free time to be able to go out and sell new business, which is the goal. So I think this industry is on a journey. I like sports. If we're baseball, we're probably only in the third inning in terms of the ability to really use technology and data to be more efficient, leaner, and drive better growth.
· Matt Reustle
[00:00:00] S0: And tying it back into the M&A—it's always great in concept, but sometimes where M&A can break down is the integration, and it can be technology integration. Have you found that this sector, the integration follows a standard playbook? Do you see that cause challenges for businesses, whether it's ones that you've been around or have seen elsewhere? It seems M&A is just part of the model. But when you factor in the incorporation of what you mentioned, with records and filings and everything that goes into it, I would imagine that it's not easy.