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Insurance Broker Valuations: What Is The Right Multiple?
by Managing Partner, Mike Fletcher
Overview
In our last article, Insurance Broker Valuations Gone Wild, I commented that in 25 years of working in insurance M&A, I have never seen such a wide gap in insurance broker valuations as we are seeing today.
That gap has only become more pronounced. At the time of writing, Brown & Brown currently trades at approximately 11.2x EBITDA. Recently, publicly traded Baldwin, roughly one-fourth the size of Brown & Brown, was taken private by the Dell family office at approximately 20x EBITDA. Prior to that, PE-backed USI was sold to publicly traded Aon for approximately 17x EBITDA.
As we noted previously, AssuredPartners recently sold for approximately 14.3x EBITDA, while Risk Strategies traded at approximately 16x EBITDA. In the private market, where we operate, we have seen companies with $5 million to $10 million of EBITDA achieve higher valuations than public companies more than 50 times their size. At the same time, other private-equity-backed brokers with approximately $100 million of EBITDA have stalled, receiving few or no bids.
This raises a basic question: What is the appropriate valuation for an insurance broker?
Public Markets Provide the Clearest Benchmark
Our firm is involved in more than 40 private transactions each year. Even so, I continue to believe that public-market data provides the best starting point for valuing an insurance brokerage.
There are several reasons for this:
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The information is publicly available.
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The financial statements are subject to significant scrutiny.
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The results are typically audited by major accounting firms.
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Public companies provide a transparent reference point for how investors value insurance distribution businesses.
We have historically viewed Brown & Brown as a bellwether for insurance broker valuations. It is a large, publicly traded, pure-play insurance broker with a long operating history, a diversified business, and a widely followed stock. Its valuation provides one of the clearest reference points for what investors are willing to pay for an insurance brokerage platform.
That said, Brown & Brown should not be viewed in isolation. Arthur J. Gallagher and other publicly traded brokers should also be included in a meaningful analysis. This should include HUB, USI, and HRH, all of which were publicly traded during portions of the historical period being analyzed, where relevant data is available. Looking at a broader group helps distinguish company-specific factors from broader market trends.
From approximately 2000 through 2010, mid-market publicly traded insurance brokers generally traded at around 10.7x EBITDA. Before their takeover premiums, USI and HUB traded at roughly 11.4x and 9.7x trailing EBITDA before they were bought in 2007, and HRH traded at about 9.7x before Willis bought it in 2008
Over the following decade, valuations climbed. Public broker multiples rose from 9.2x in 2016 to about 16.5x by 2020. They peaked at roughly 19-20x EBITDA in 2021, driven by heavy private equity demand for the sector.
Beginning in 2022, valuations eased modestly as interest rates rose and investors became more selective. Public broker multiples slipped from their 2021 peak to roughly 16.7x EBITDA and held there through 2023.
If today’s interest-rate environment is more comparable to the period before the era of ultra-low rates, then a 10x to 12x EBITDA valuation for a large, high-quality insurance broker may appear reasonable. Brown & Brown, trading at approximately 11.2x EBITDA, would seem to fit within that framework.
But how do we explain Baldwin’s approximately 20x EBITDA transaction?
Did the Dell family office overpay by roughly 80%? Or does the transaction indicate that certain buyers view the best insurance distribution businesses differently from the public markets?
Are Insurance Brokers Similar to Real Estate Investments?
When insurance broker valuations began climbing, I initially questioned whether the increase was driven solely by lower interest rates or whether something else was happening.
One theory is that institutional investors began to re-rate insurance brokers as more comparable to real estate assets, particularly high-quality, income-producing real estate.
For example, a high-quality real estate asset trading at a 5% capitalization rate is equivalent, broadly speaking, to paying 20x annual cash flow. Even with the commercial real estate market under pressure over the past two years, it is difficult to find a high-quality real estate investment trading at the equivalent of only 10x to 12x EBITDA. Could some investors be viewing insurance distribution as an asset class with characteristics similar to real estate? There are meaningful similarities.
An apartment building provides a recurring base of tenants, with a high percentage renewing their leases each year. Recessions may affect occupancy and rental growth, but most people still need a place to live. Insurance brokers also have recurring-revenue characteristics. Client retention rates are often approximately 90%, and businesses and individuals generally must maintain insurance coverage, whether required by law, a lender, or simply by necessity. Insurance is not a discretionary product for most customers.
In other words, the cash-flow predictability of a strong insurance brokerage may resemble the recurring rental income of a high-quality apartment property.
Is Insurance Distribution Being Valued Like Real Estate?
If a broker generates highly recurring and predictable cash flow, then paying 20x EBITDA may be comparable, conceptually, to paying 20x net operating income for an apartment complex in a major American city. That does not mean the two asset classes are identical. Real estate has physical assets, financing characteristics, tax benefits, and residual value. Insurance brokers, by contrast, are primarily people- and relationship-driven businesses. Their value depends on client retention, producer productivity, organic growth, margins, carrier relationships, and the durability of their recurring revenue.
Still, the comparison raises an important question:
Are investors increasingly willing to pay real-estate-like valuations for businesses that produce stable, recurring, and relatively defensive cash flow? If so, the traditional 10x-to-12x EBITDA framework may not fully explain the highest-quality insurance broker transactions. The market may be recognizing that the best insurance brokers are not simply service businesses valued on current earnings. They are platforms that generate durable, recurring cash flow, more like long-term infrastructure than traditional professional-services firms.
That may be one reason the valuation gap has become so wide. The question is no longer simply what multiple an insurance broker deserves. It is which characteristics justify a premium multiple, and whether the market is beginning to value those characteristics differently than it has in the past.