Insurance agency valuations – and nearly all asset valuations – have been on a tear ever since the 2016 presidential election. Within our M&A practice, we are seeing medium-sized agencies attract multiples close to what their publicly-traded counterparts were receiving just a few years ago. This poses the question: has the industry itself changed to warrant new valuations?
We recently wrote about how private equity and low interest rates have impacted agency and broker valuations. How will this trend impact prices? Have investors permanently repriced the value they place on agency-generated cash flows? Is there less risk, or better growth prospects? And ultimately; is it truly different this time?
World-renowned economists Carmen M. Reinhart & Kenneth S. Rogoff penned the following opening in their 2009 book, This Time is Different:
"Every few decades, the economy’s major players develop bulletproof confidence in the efficiency of markets and the health of the economy. Known as “this-time-is-different syndrome,” this unrealistic optimism afflicted bankers, investors, and policy makers before the 1930s Great Depression, the 1980s Third World debt crisis, the 1990s Asian and Latin American meltdowns, and the major 2008-2009 global downturn. Conditions differed, but the same mindset – a dangerous mix of hubris, euphoria, and amnesia – led to each of these collapses. In each case, decision makers adopted beliefs that defied economic history. In the 1920s, conventional wisdom held that large-scale wars were a thing of the past, and that political stability and economic growth would replace the volatility of the years preceding World War I. Events quickly proved the optimists wrong. By the 1980s, economists were convinced that high commodity prices, low interest rates, and reinvested oil profits would prop up the economy forever. Before the 2008 recession, popular thinking said globalization, better technology, and sophisticated monetary policy would prevent an economic collapse. Every time, fiscal leaders thought they had learned history’s lessons and that this time the economy was different."
As 95% of the deals we work on are private, we cannot disclose first-hand valuations data, but there is a breadth of publicly available data which illustrates the frenzied state of insurance agency valuations. Below is a look from Brown and Brown (NYSE: BRO) and Arthur J. Gallagher and Company (NYSE: AJG), two of the most successful insurance brokers and great proxies for the overall mood in the mid-market insurance agency business.
Over the past ten years, Brown & Brown has traded at an average EBITDA multiple of 10.9x (EV/EBITDA TTM). Today, it trades at 15.47x, which is a 41% premium.
Over the past ten years, AJF has traded at an average EBITDA multiple of 13.1x (EV/EBITDA TTM). Today, it trades at 16.6x, which is a 26% premium.
We ask ourselves again: is it different this time? There are legitimate reasons why one could argue the latest multiples are here to stay, including President Trump’s new tax cuts and 3%+ GDP growth. However, I am still a believer that everything reverts to the mean. If history should repeat itself, I suspect Private Agency Valuations will compress vis-a-vis multiple arbitrages. That is, unless, this time, it really is different.
Regardless of market fluctuations, it’s crucial to know your worth to ensure you’re receiving the best valuation possible, as a stronger EBITDA directly correlates to a stronger sales price. Sica | Fletcher’s negotiated EBITDA has proven to increase valuations by an average of 30%. If you’re ready to evaluate your options or have outstanding questions, reach out to Sica | Fletcher today.