Expert Commentary

Agents and Brokers Look Abroad for Expansion

This article is an update to my November 2009 article, Insurance Agency/Broker Valuations Remain Uncertain. The impact of recent industry trends on the growth, risk, and profitability of industry participants is discussed below.

Valuation of Insurance Organizations
May 2012

Consumers and businesses often reduce coverage or increase deductibles during economic downturns to save money on premium costs. Additionally, the demand for commercial coverage slows as companies go out of business or reduce staff.1 Thus, the negative economic trends experienced during the recession of 2008 and 2009 placed pressure on insurers to maintain pricing and volume.

After the period of soft pricing during and immediately following the recession, rising prices and improving economic conditions lifted the financial performance of the largest publicly traded insurance brokers during 2011.2 Although insurance price increases were modest and limited to certain lines of business, such as middle-market property/casualty and some specialty lines, the higher prices benefited brokers. Agencies and brokers were successful in passing along the price increases with strong markups, thus improving overall profitability. Additionally, favorable prices benefited brokers quickly because, unlike insurance companies, brokers do not earn their commissions over time. The industry experienced a slow recovery in 2010 before rebounding 6.9 percent in 2011 and is on track for growth of 4.5 percent in 2012.3

Despite the successes in the industry during 2011 and the first quarter of 2012, industry leaders do not believe the industry is in a classic hard market. While prices are clearly rising, other conditions of a traditional hard market are not in place. A market is defined by more than just pricing, according to an Aon executive. The dynamics include terms and conditions, adequacy of limits, individual insurer appetites, geography, and other factors in addition to pricing. Other executives believe the industry is in a state of transition where it is moving from one market to the next.4

Trends in the Industry

Several insurance agencies and brokerage firms are looking abroad for expansion. Aon experienced growth in emerging markets and across Asia-Pacific, including double-digit growth in countries such as Thailand, China, Japan, and Malaysia, adding evidence of firming pricing in catastrophe-exposed regions. Aon announced plans to relocate its corporate headquarters from Chicago to London, citing better access to global insurance markets and more favorable tax rates.5

Transaction activity has also driven industry growth. The number of mergers and acquisitions completed in 2011 was significantly higher than in prior years and almost reached the record number of transactions that occurred in 2008. For example, Arthur J. Gallagher & Co. completed a record-high 32 acquisitions in 2011, which helped the company expand its international presence and enhance revenues and profitability.6

Moreover, the amounts paid for the transactions in 2011 were both aggressive and unique. Activity in 2011 demonstrated a renewed emphasis on the size and quality of the target from all buyer segments. The total number of transactions signaled a sellers' market, while the increase in price paid, especially for platform acquisitions, also signaled a strong sellers' market.7 Higher levels of revenue and profitability achieved by acquisition targets and the perception of less risk in the industry resulted in higher valuations.

The robust transaction activity has been sparked by larger companies' ability to access capital in a tight lending market, as these companies have stronger balance sheets than many of their smaller counterparts.8

Trends in Valuation Multiples

Industry analysts reference enterprise value (EV) to earnings before interest, taxes, depreciation, and amortization (EBITDA) multiples when discussing valuation metrics for insurance brokers and agencies. Multiples reflect the level of risk associated with a company as well as growth prospects. In this article, we focus on next 12 months EBITDA multiples, as discussed below. We also present the projected long-term earnings per share (EPS) growth rates as of January 2009 through April 2012 based on data provided by Capital IQ.

For purposes of analyzing current market valuations, we compiled valuation statistics for the following group of publicly traded companies (the "Industry Group") that is representative of the agency and broker segment of the insurance industry:

  • Arthur J. Gallagher & Co. ("AJG")
  • Aon, Inc. ("AOC")
  • Brown & Brown, Inc. ("BRO")
  • Marsh & McLennan Companies, Inc. ("MMC")
  • Willis Group Holdings ("WSH")

Figure 1 illustrates the average forward EV-to-EBITDA multiple for the Industry Group from January 2009 through April 2012. Multiples continued to improve and strengthen during the first half of 2011, tracking an improving economy and strong stock market returns. Multiples rose as high as 9.4 times for the first time since the middle of 2007. The Industry Group experienced a decline in line with the stock market during the third quarter of 2011. However, this decrease was only temporary as investors did not believe that the lower multiples matched long-term earnings estimates. From the third quarter of 2011 through April 2012, multiples trended upward over time. Average EBITDA multiples in April 2012 were at the levels observed in the first half of 2011 and during the economic boom of 2006 and 2007. The expansion of multiples over this period could be driven by improved pricing for certain lines, positive consumer and business sentiment, and restored accessibility of capital markets to fund acquisitions.

Figure 1:

Average Forward EV/EBITDA Multiples Based on Next 12 Months

Figure 2 illustrates the projected long-term EPS growth rates as of January 2009 through April 2012 based on data provided by Capital IQ. During the period observed, long-term EPS growth rates trended upward from a low of 8.8 percent in early 2010 to 10.8 percent in April 2012. However, we noted that long-term earnings growth was relatively stable from the third quarter of 2011 through April 2012. Despite this stability in the long-term earnings outlook, multiples have continued to show expansion. The increase in multiples could be a result of the market perceiving less risk in the forward estimates provided by the Industry Group.

Figure 2:

Average EPS Growth


Top-line growth and profitability for insurance brokers in 2012 is expected to be similar to 2011. Nevertheless, the competitive fundamentals of the property/casualty insurance market and moderate pace of the global economic recovery will continue to challenge significant improvements in operating performance for insurance brokers. Top-line growth is expected to be driven by price increases in select business lines that will benefit commission-based brokerage revenues over the next 12 months. However, brokers' revenue growth is expected to be tempered due to flat rates in the broader commercial insurance market and a shrinking supply of sizeable acquisition targets that would significantly augment the acquirers' total revenues.9

Because of potential pressures placed on pricing and volumes for brokers, the largest brokers will look to alternative sources of growth such as acquisitions and growth overseas, which will help drive top-line growth and operating leverage. The ability for companies to diversify geographically or in terms of service offerings, particularly in an increasingly global marketplace, may offset industry risks and drive growth in the face of an uncertain industry market.10

1Insurance Brokers & Agencies in the US: Market Research Report (IBISWorld, April 2012).

2"Brokers boosted by price increases, better economy," Business Insurance, March 26, 2012, 14.

3Insurance Brokers & Agencies in the US: Market Research Report (IBISWorld, April 2012).

4"Current Market Not Yet a 'Classic' Hard Market: P/C Executives," Insurance Journal, April 23, 2012.

5"Brokers boosted by price increases, better economy," Business Insurance, March 26, 2012, 14.

6Arthur J. Gallagher & Co., Expanding Our Global Presence: 2011 Annual Report to Stockholders, 4.

7"Multiples on the Rise," Dealmaker's Dialogue, February 2012.

8Insurance Brokers & Agencies in the US: Market Research Report (IBISWorld, April 2012).

9"Fitch Releases U.S. Insurance Broker 2012 Outlook Report," Business Wire, December 8, 2011.

10Insurance Brokers & Agencies in the US: Market Research Report (IBISWorld, April 2012).

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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