Valuations soaring for brokerages

It’s a great time to be a publicly traded brokerage.

Wall Street’s current success has led to high valuations of insurance agencies and brokerages, says Kevin Stipe, president of Regan Consulting, an Atlanta-based management consulting firm. “We’re just in a crazy marketplace right now,” he says. “Valuations are extremely high.”

They should stay that way as long as multiples remain high, Stipe says. “We’ll probably see this continue for a while,” he says.

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There’s also a huge appetite for acquisitions — particularly from private equity buyers, which accounted for 43% of all acquisitions in 2014, Stipe says. “These buyers are most responsible for pushing acquisition multiples to record levels,” he says. “With widespread buyer demand, there is nothing today to suggest that valuations will be going down any time soon.”

Benefit brokers are highly motivated to acquire resources from larger companies, Stipe says, as clients are seeking more offerings. Products like wellness programs, onsite medical clinics, analytics and managing absenteeism — clients expect brokers to provide them all.

That’s forcing middle-market brokers to partner with outside vendors and/or join a larger firm, Stipe says. “You can’t build all that stuff internally,” he says. “The competitive landscape is driving all of that.”

Broker profitability increases

Broker profitability was 21% in 2014, according to Regan’s organic growth and profitability survey. The median earnings before interest, taxes, depreciation and amortization (EBITDA) was 19.3% in 2013 and 18.4% in 2012.

For a third straight year, the industry experienced a median organic growth of 6.2% in 2014, the survey found, and that growth is expected to hold at 6% for 2015.

Continued expansion, however, hinges on recruiting younger talent — something the industry struggles with. “A shortfall in recruiting is a long-term threat to growth, profitability and perpetuation of independent firms,” Stipe says.

About six in 10 firms aren’t hiring enough new employees to achieve their growth goals, Stipe says. “If you don’t have young, up-and-coming producers in your shop, perpetuation will become impossible,” he says.

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Unfortunately, the pressure to increase profits hinders a firm’s ability to recruit new talent, Stipe says. Brokerages don’t have the time to recruit and train new hires, he says, compounding the problem.

A lack of youth isn’t unique to brokerages, Stipe says. “Everybody is wrestling with this today,” he says.