What Does It All Mean?
This week, MarshBerry is hosting our first ever virtual, but eighth annual, MarshBerry 360 Summit. The MarshBerry 360 captures the full view of the insurance distribution marketplace, from organic growth to Mergers & Acquisitions (“M&A”).
Today’s session covered the current State of the Industry. The insight covered the challenges and opportunities facing independently owned agents and brokers in the upcoming year. When asked to define the current state of the industry, it is best summed up in this original poem:
THE WHITE HORSE
THAT WAS ASLEEP IN A FIELD OF HIGH COTTON
IS NOW WIDE AWAKE
HOLDING ONTO CAUTIOUS OPTIMISM
DURING A PERIOD OF ELEVATED RISK
WHILE THE BLACK SWAN
IS FLIRTING WITH THE APOCALYPSE
THAT TEETERS ON THE ELECTION
~ John Wepler
But, what does it all mean…?
White Horse: The insurance distribution industry itself. As we’ve mentioned time and time again, we feel insurance distribution is one of the best industries to be in, period. Even terrible agencies have 84%+ recurring revenues. The business is characterized by high cash flow, low capital expenditures and high barriers to entry. The largest line item for nearly every firm is a controllable variable -producer compensation.
High Cotton: The insurance brokerage environment has been a tailwind at the back of an industry with strong fundamentals. Premiums increasing driving organic growth without new business, exposure bases increasing at near full employment levels, transaction values seemingly approaching the stratosphere. We’ve said multiple times it couldn’t get any better, and yet year in and year-out, it did.
Wide Awake: It’s likely the unemployment filings of the last two months have woken up anyone who had been lulled into security by the booming economic environment. Nearly 34 million jobless claims had been filed up in the seven weeks ending May 2, 2020. We’re not quite at the 25.5% unemployment rate of the great depression in 1932, but in April that was 14.7% and still climbing.
Cautious Optimism but Elevated Risk: There are many factors in the insurance distribution marketplace and the broader economy that present some positive signs, but also point to a fragile underlying position. The stock market has come back from the bottom in the fourth week of March. Buyers are still executing deals, albeit with a higher degree of scrutiny and differentiation between those high- and low-quality firms. The high yield debt markets are essentially closed but most buyers are well capitalized.
Black Swan: An unpredictable event characterized by its extreme rarity and widespread impact. Obviously, the pandemic itself fits this definition. Someone, somewhere, may have been predicting this or speaking to the global vulnerabilities, but if they were, no one was listening.
Apocalypse Teetering on the Election: Many brokers have taken advantage of the low cost of capital over the last number of years and have become “highly levered,” which is a tenuous position to be in today. If revenue declines 10% with no change in EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization) margin for a firm with a 7.5x debt/EBITDA leverage ratio, that ratio becomes 8.5x debt/EBITDA, which is likely to result in a credit downgrade. Politics aside, the presidential election cycle adds even more uncertainty to what the future economic conditions will look like for 2021 and beyond.
The MarshBerry 360 Virtual Series tomorrow focuses more specifically on the Evolution of M&A and Succession Planning During the Pandemic and we wrap up the series Thursday with Your Next 90-Day Sales Strategy. Make sure to subscribe to MarshBerry’s blog to stay up-to-date on all MarshBerry content and events. Virtual or otherwise!
If you have questions about Today’s ViewPoint, or would like to learn more about the State of the Industry, please email or call John Wepler, Chairman & CEO, at 440.392.6572.
As we keep our eye firmly focused on the industry and actions within it, we are eager to know what you are experiencing. Take a quick 3-minute MarshBerry Pulse survey to help us gauge the industry’s response and outlook as the country moves towards “open for business” from the anticipated loosening of stay-at-home orders.
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