# PE Perspective on Insurance Brokers - [Business Breakdowns, EP.225] Business Breakdowns · 2025-08-07 · 59 min · https://www.youtube.com/watch?v=MIiE-SGbXy8 ## Transcript Matt Reustle All right, Aaron, I'm excited to have you here, and I think we'll spend the majority of our conversation on insurance brokerage. It's a fascinating subsector that's proven valuable to public-market investors and private-market investors like yourself. I thought a good place to start would be table-setting with your industry coverage: what encompasses what you're looking at? I know it goes broader than just insurance brokerage, so maybe you can start there and we can take the conversation down a few notches as we go on. Aaron Cohen Of course, Matt. Just to level-set who I am and what we do, I'm Aaron Cohen. I'm a managing director at GTCR, a Chicago-based private equity firm. We invest behind a strategy that we've created called the Leaders Strategy: backing world-class CEOs to build and transform companies in industries we know very well. Private equity has a lot of things in common, but the one thing that differentiates us is the intersection of our Leaders Strategy and domain expertise. Maybe that'll help get into a little bit about what I do. I lead our financial services and financial technology investing industry group, and that actually is a good example. Financial services and technology is a sector, and it's so large that within that sector, we probably invest in 9 or 10 different industries, with insurance being one of them. Even though I oversee that industry, I specifically spend all of my time investing in 2 primary industries, and insurance is one of them. In insurance, that's everything: insurance brokerage, the carrier side of the business, insurance premium finance, data and analytics, software, and claims management. We love the insurance ecosystem, which we look forward to digging into and discussing. GTCR as a whole invests across 4 different industries. We've been investing in that space behind the same strategy for over 45 years. Matt Reustle On the Leaders Strategy, no one would argue the importance of management teams. At the same time, it's thrown around a lot and carelessly sometimes. Can you spell out a bit more about what that means for GTCR? What does great look like? What can you get into in terms of what separates great leaders? Aaron Cohen Absolutely. For us, we think the CEO is the most important decision we make when we underwrite an investment. What does that mean? Everybody in our industry chases deals and does proactive work in industries to find opportunities, but for us, the deal is secondary. Everyone's looking for the next deal. We believe there are plenty of companies out there where, with great leadership, we could improve, transform, and create a market leader. For us, the scarce resource is a CEO. There are very few CEOs who can do what we want to partner with them to do. We're spending all of our time in our investment committee, with our deal teams, talking about the pipeline of CEOs that we're building relationships with, nourishing, and hopefully eventually partnering with to bring into an investment that we make to help us grow that business. Then, to your question, what does great look like? Even though we invest across 4 broad industries—business and consumer services, healthcare, technology and internet infrastructure, and my group, financial services and technology—our CEOs have a lot of similar characteristics. First and most importantly, they're proven money-makers. How do you define a money-maker? It's someone who has created equity value in the past for their shareholders. It can be for public shareholders, private equity, or family-owned businesses, but it's great leaders who've created value. A lot of times, you'll see a wonderful CEO on paper who grew a business 100% over 5 years, but if their stock price didn't move, that's not what we're looking for. We need people who create value because that's what we're paid to do for our investors. That's the most important characteristic. Then there are other critical components that you develop pattern recognition for when you meet a lot of CEOs over your career. Another one is people. CEOs always have great executives who will follow them from job to job and company to company, through thick and thin. They will work and make things happen. That is one of the hallmarks of a great leader: when we hire a CEO and he or she says, “I have a great CFO. I know who's perfect for operations, and I have a fantastic CFO.” Matt Reustle I'm curious because it's such a fascinating concept, and I generally align with your views about its importance and it being paramount for these businesses. When you consider the different sizes and scales of businesses, do great leaders transcend across those various milestones and size points? Can you talk a bit more about that, looking at maybe a smaller business versus some of the larger-scale businesses that you've certainly stepped into in recent years? Aaron Cohen Great CEOs, Matt, don't always transcend. They might not transcend across size or industries. At GTCR, when we say we're going to back a great CEO who's proven to have created value in the past for his or her investors, that doesn't mean we're going to back them to be the CEO of any business. We like to back insurance CEOs to run insurance companies. We like to back pharma CEOs to run pharma companies. I would not even back an insurance brokerage CEO to go run an insurance data and analytics business. We want to back CEOs in industries they've built and created value in in the past. That allows them to avoid the simple mistakes that first-time CEOs make, or it avoids them having to take a tremendous amount of time to learn a new industry. We back CEOs in industries where they've created value in the past. Then, on your question about size, I think CEOs are comfortable at different size levels. There are certain CEOs who can see the forest through the trees, but also love to be in the weeds and be a command-and-control CEO, with ownership of every single functional area in their company. You can't do that in a $5 billion company the way you can in a company of maybe a few hundred million dollars. Sometimes we have great CEOs who are wonderful at trusting and managing their direct reports, great at setting strategy and managing people, and capable of running a $5 billion or $10 billion company. I don't think every CEO can transcend across size. Matt Reustle I love the nuance. It's incredibly helpful, and I think it's just such an interesting topic and subject. We can transition a bit into the insurance brokerage space itself, and I'm sure we'll mix in some of the other categories within insurance to flesh out the conversation. I love talking to guests who have extended tenures in certain industries or subsectors. Can you share just a bit about your history with the space and, to some extent, what has changed versus what has not changed over the years as you've looked at the insurance brokerage space? Aaron Cohen I've been investing in the space for a little over 20 years. It's an interesting question: what has changed and what has not changed? I'd say the core fundamentals of the industry have not changed. What is that? Most importantly, it's an industry that's less cyclical than most. Regardless of what's going on in the economy, you need to have insurance. You need to have your employees covered, you need to have your property covered, and you need to make sure you have the appropriate insurance. So it's less cyclical than most industries. Second, it's an asset-light business model. Third, the cash-flow characteristics are fantastic in this industry. You have EBITDA, and there's not much else below that for cash conversion. When you think about the cash-flow characteristics after EBITDA and capex, it's not a capital-intensive business. We used to joke that when your CEO broke his iPad, that was the capital you spent. Now, of course, with time, a lot of these companies are investing in data warehouses and technology to help drive more efficiencies, but it's still relatively capital-light. And then, on the cash flow side of the business, since it is an acquisitive industry, you get tremendous tax benefits by acquiring these tuck-in acquisitions that give you a tax shield. So, cash flow characteristics in this industry are fantastic. Then I'd say the next point, which we'll talk about, is M&A. This is a highly fragmented industry, and for GTCR, when we think about tuck-in acquisitions, you have a great management team and a great platform. You invest in the infrastructure and the technology, and then M&A just becomes an additional leg of growth and value creation for the story. With M&A, when we have the centralized oversight, infrastructure, and people to support our tuck-in acquisitions, it gives them the opportunity to clear things off their plates. When you do a small acquisition, that management team might be doing payroll, investing in their technology, and selling insurance. We take all that off their plate so their producers can do one thing, which is sell new insurance. So, this industry has evolved in a couple of ways, but those things have stayed the same. I'd say what's unique in this industry, or what's changed over the last 20 years, is their ability to embrace technology and data. Now, that being said, there's still a long way to go to do that. I think this industry is still behind many others. Second, what's changed is that these brokers have become bigger, and they've been able to have more influence over their insurance carrier partners. So, what does that mean? That means that you could drive better commission rates and better contingent commissions based on volume levels. It's allowing the broker to have a real seat at the table. Not too long ago, in the mid-80s—maybe that's a long time ago now, maybe the mid-90s—insurance brokers were small, and they didn't have the ability to influence their financial situation. Now they do, because if you think of an insurance broker putting billions of dollars of premiums with a certain carrier, they—the carrier, that is—are really relying on the broker and its ability to bring them business, which should drive more value to the broker. And I'd say, just generally speaking, another reason why insurance brokerage is so fantastic is because we believe, in financial services, that the person who owns the customer relationship should be able to drive more value out of the entire ecosystem. Brokerage is a perfect example of how that's evolved over the last 20 years. Matt Reustle To that point on the carrier-broker relationship, you could, in theory, have carriers underwriting and talking to customers themselves. I think you certainly do still have that direct selling out there, but has there been a material change in just the percentage of the market that's represented by brokers over time? Has that been a share gainer or a tailwind for the market? Aaron Cohen You have to split up the industry into personal lines and commercial lines. Of course, we all are familiar with the very successful direct-to-consumer personal lines of GEICO and Progressive. They have taken market share away from brokers over the last 20 years. That being said, their market share growth has slowed recently. On the commercial side, you don't see what we call consumer, or direct-to-business, relationships from the carriers. There are a lot of reasons for that, but most importantly, it's because the insurance broker plays a very important role that some people don't appreciate, and that's as an adviser. If you're a midsized business or a family business that has 20 trucks doing short-haul deliveries around a certain geography, your entire family's net worth is tied up in that business. The one thing that could bring that down is not having the right coverage. That could mean not having the right liability coverage if one of your drivers gets in an accident, not having the right coverage if one of your drivers is hurt, or not having the right coverage if you ruin some of the product that's on your truck. The CEOs and leaders of these small and midsize businesses value the insurance broker's advice. They value their advice around deductibles, what insurance they need, and what insurance they don't need. I think another aspect of insurance brokerage that's evolving is specialization, because a lot of industries are becoming more and more regulated, and your insurance broker really needs to understand and follow the industry to be able to evolve your insurance and make sure you have the right protection. That has been driving the consolidation in this industry, especially for the last 10 years, and our investment in AssuredPartners. This was definitely one of the drivers of our success: we had centers of excellence. Think of the traditional insurance broker in a small-to-midsize town. They're insuring everyone on Main Street. They're insuring the barber shop, the plumber, and the person who owns a bunch of trucks to deliver on behalf of Amazon. They're truly generalists. Now what has happened is that they don't have the expertise to be able to change their advice based on small changes in a specific industry, because they're just too busy. If you think about something at AssuredPartners, we had long-term care facilities. That industry is driven by Medicare and the payers, and you know how complex the health insurance industry—and health in general—is in our country. You need someone who really understands the industry and understands, if you're taking on Medicare patients, whether there are certain types of insurance that the government mandates you to have. Therefore, specialization in this industry is what's driving the acquisition flow as well. When you look at that, you see a tremendous opportunity, because what happens is retention goes up with your customers. Retention has always been fantastic in this industry, but the generalists have high-80s, low-90s retention. The specialists are in the mid-to-high 90s because they understand your business. Matt Reustle When you think about that specialization and how it would translate to the bigger businesses—maybe the acquirers of businesses—in your mind, is the ideal insurance brokerage one with several segments, each with its specialists in those categories, or is it pure play, where it's a business and, while it might have scale, it's specialized in one specific line or insurance type? Aaron Cohen Matt, what's funny is that I joke internally at GTCR that I love insurance brokerage because of one word: diversification. And I mean that across every aspect of this business. Insurance brokerage needs to be diversified across carriers, customers, producers, and end markets. So, you can have multiple specialization focuses within one broker. I think that builds a better, more sustainable business. Matt Reustle When you are stepping into an insurance brokerage business and you're thinking about laying out the plan of attack, can you talk a little bit about whether there is a playbook or a strategy for ranking what you're typically looking to do alongside that leader you're either putting in place or who is already there? Aaron Cohen I'm going to go back to the last question, where you used the word diversification. We don't want to invest in an insurance broker that is highly dependent on one carrier or one producer. You'll see that a lot, especially in the small acquisitions we've done in the past, where 2 or 3 producers basically are the entire business. They own all the customer relationships. Then you're just relying on those people, and the question really becomes: who owns the business? Is it you, or is it the producer who owns the customer relationship? So, we want some level of diversification. Number 2, I'd say we're looking for some basic centralized infrastructure. They have the right agency management system and the appropriate technology to support the brokers. We'll invest in that, but if you're looking at a specific broker, you want them to have that. Most importantly, it's all about the people. This is a business where we don't have machines making widgets. We have people—human beings with emotions and personal lives—who have to go out and satisfy our existing customers and win new customers every single day. You need to have great leaders who understand that and know how to work and partner with the brokers and the entire organization to be able to drive success. If a broker's unhappy with his job or something's going on in his life—we've all had good days and bad days—you don't sell. Machines don't have emotions. It's wonderful; they just keep on plowing along. But here, it's all about having CEOs and regional leaders who have great EQ and can partner with their sales folks and people in the market to be able to drive business. Matt Reustle As you think about the competition, I think what you mentioned in terms of operating the business—the importance of the people involved, all the way down from the top to the producers—stands out when they're actually out there looking to make the sales. What does competition actually look like? How fierce is it when you're thinking about whether it's maintaining—the retention rates are quite impressive—but not just maintaining, actually growing the business? What comes into play with the business model in terms of just winning more business in the future? Aaron Cohen There is a tremendous amount of competition in this industry. As you go through the list of the top 20 insurance brokers, they're probably all billion-dollar-plus companies. So, there's a tremendous amount of competition. That being said, as you mentioned, retention is very, very strong in this industry. The irony is that this is an industry—and I've never seen any other industry like this—where we don't set our price. Our customers are not shopping the insurance broker's price. Sometimes they're shopping the carrier's price, which means that, if you're doing your job as an insurance broker, you're giving multiple options to your customer and finding them the best price. So it's an industry where you don't set your price, and your customers don't shop your price. The irony is that, in an industry where there are what we call hard and soft markets—hard markets are rising rates and rising premiums for a bunch of reasons we could talk about if you want, or a soft market when rates are coming down—in a rising-rate environment, in a hard market, a lot of times you see some attrition. Even though you're getting the best rate for your customer, if their rate went up 15%, even though you've gotten them 5 quotes from the 5 largest and most respected insurance carriers out there, they just feel like they need to shop it. That's when you see some attrition, even though it's outside the control of the broker. A lot of times they're not going to get a better price from someone else, but sometimes you just feel like they want to see that change. So it's something very unique in this industry that you don't see in many others. The other thing I'd say is that where we've seen retention grow and organic growth accelerate is once we buy some of these acquisitions. A lot of times people say, "You buy the founder out, they're done. You see growth slow." We've actually seen the inverse, because what we've seen is we'll buy out a founder. AssuredPartners is the most recent one. A lot of times that founder will roll a significant amount of their proceeds into our business. Then they're freed up to be able to go out and grow their business and not have the handcuffs of dealing with all the corporate stuff. But, most importantly, they get access to our center of excellence. So you buy a broker in Green Bay who's focused on farming and commercial transportation, and all of a sudden they're going to get a nationwide network of experts to be able to help educate their clients and get them even better coverage. So it's a really interesting industry in that way. Matt Reustle Absolutely. And to ask a similar question, but slightly differently, when you're thinking about the investment opportunity, is market share growth—or the capturing of additional market share through organic expansion—core to the thesis, or could you underwrite some of these just based on maintaining market share within a growing pie going forward? If you could separate those 2, I'm just trying to capture the understanding of how important it is to capture more and more of the industry organically versus doing it through M&A or just capturing the tailwind in the market. Aaron Cohen Most importantly, if you want to grow your pie and increase your market share, that will drive premium valuations on the exit. This industry, as we've discussed and as you read research on the large public companies, everyone focuses on 2 growth stats: total growth, which includes M&A, and organic growth, which is what drives those wonderful valuations. So for us, when you find the great CEO who can absolutely drive organic growth but understands and executes M&A, that's a win-win. That being said, to your question, you have seen insurance brokers be very successful by growing with inflation, for lack of a better term, and driving a lot of value creation through M&A. The best success stories do them both. Matt Reustle Yep. Constellation Software is a completely different industry, but there hasn't been much focus on organic growth historically there, and they've done quite all right just riding the tailwinds. Aaron Cohen Well, it's interesting, Matt, on that topic. There are players in this industry that don't push organic growth, and the flip side is they have higher margins because they're not investing in producers. They're not investing in go-to-market. So, while this industry is a wonderful, wonderful industry, competitors look very similar until you really dig deep. You can look at a competitor and look at their EBITDA margins and pretty much guess what their organic growth is. Matt Reustle Yeah. That makes those ROICs look better with those margins, at least in the short term. On the scale point, I think it comes with a lot of things. I think earlier on you mentioned it should be able to get you better pricing, or there should be some economies of scale with the carriers. Does that tend to show up in terms of the offering that they can provide to customers, and how meaningful is that in terms of driving a difference that shows up in results? Aaron Cohen It all depends on size. I've looked at insurance brokers with a few hundred thousand dollars of EBITDA—not even revenue—and I've looked at insurance brokers with hundreds of millions of dollars of EBITDA. I would say what's important on the scale side is that those small brokers don't have access to all the markets—another term for the carriers—that a large broker would have because, if they don't have a lot of volume, a lot of the carriers don't even want to talk to them. They don't want to spend time quoting their business. So I think as you grow, it brings you more optionality and access to more markets and, hopefully, better terms and better pricing for your customer. So I think that's where size does matter. I don't think there's a perfect threshold for what size you have to be to be able to have access to the markets. It all depends on your end market that you're writing, your customer size, et cetera. So that's how I think about size relative to access. But I think once you're an established business, you have $100 million-plus of revenue, you will be able to access all the markets that you'll need to be able to get the best product for your customer. Matt Reustle Early on you mentioned the adoption or incorporation of technology into the system. How is that showing up? Where does it show up, and what difference does the technology make for the business? Aaron Cohen Sure. I like to make the joke, but I don't think I'm joking. People say financial services is about 5 or 10 years behind the rest of the world in terms of adopting technology. I think that's right. But I think insurance and insurance brokerage are probably 10 to 15 years behind. Now, we're coming up pretty quickly, but there are a bunch of different areas where technology helps. First and most importantly, it's having one agency management system across the organization. An agency management system—think of that as the ERP system where the brokers live—is where they put potential clients. That's where they run all their processing, underwriting, acceptance, claims management, et cetera. Having one agency management system across your organization allows you to see your organization and fully understand what type of policies you're writing, what type of risks you're putting with what carriers, and have the data at your fingertips to be able to drive better negotiations with the carriers. But then it also helps the brokers. There are a tremendous amount of filings because this industry is regulated state by state. So the brokers need to have the technology to be able to quickly fill out forms and submit them to the appropriate entities or the carriers to be able to do their jobs efficiently and sell more business. There are a lot of brokers out there who are still using pen and paper. If you overlay the technology with AI, it should allow brokers to have much, much more free time to be able to go out and sell new business, which is the goal. So I think this industry is on a journey. I like sports. If we're baseball, we're probably only in the 3rd inning in terms of the ability to really use technology and data to be more efficient, leaner, and drive better growth. Matt Reustle And tying it back into the M&A, it's always great in concept, but sometimes M&A can break down in the integration, and it can be technology integration. Have you found that in this sector the integration follows a standard playbook? Do you see that causing challenges for businesses, whether it's ones that you've been around or have seen elsewhere? It seems M&A is just part of the model. But when you factor in the incorporation of what you mentioned with records and filings and everything that goes into it, I would imagine that it's not easy. Aaron Cohen It is not easy. It's probably not the hardest industry to integrate, but it takes time. You need a team, and you need to do it right. What we've seen in this industry in the past is that when you slack on integration, cut corners that look small, or don't do one thing here and another thing there, before you know it, you're a large business and it's impossible to catch up. So for us, we just bought a business over in the UK called JMG Group. They focus on small insurance brokers in the UK, and they have a playbook to integrate the business. Everyone's on the same system, using the same data, within 90 days. That allows them to run the business much more efficiently, not have surprises, and take control of those acquisitions that you bought. If you leave people on disparate systems, you're not running the business. They are. You're not getting the right KPIs to manage the business. You're not seeing what's coming around the corner. And what happens then is it's too hard to integrate, and then you're just 100 different corks floating down the river at your own speed, and eventually it catches up to you. Matt Reustle Yeah. To your point, I think FedEx might still be integrating the TNT acquisition from 10 years ago. It's a little different when there are hard assets, infrastructure, and logistics networks involved, where technology and incorporating some of those systems not only could be a bit lower of a hurdle, but it proves to add a lot of value as well. Aaron Cohen The flip side on that, Matt, is that people are used to doing things a certain way. We talked about the importance of people, and they go home every night. A lot of times, brokers are set in their ways, and they’re older and later in their careers, so they don’t want to learn a new system. You have to make sure that you’re buying a business where people are going to embrace that change. Otherwise, you could break it by forcing the integration on people who don’t want to do it, aren’t willing to do it, or are just happy using pencil and paper. Matt Reustle Yeah. Producers historically have found ways to write their own rules when it comes to managing systems. Keeping a clear mantra intact and getting people to follow protocols, I can imagine, is just insanely interesting here. The general market, when you think about revenue growth for any of these businesses, is that diversification is an incredible positive. What does the trend line look like when you think about an insurance business and top-line growth? If I were to use GDP growth as the standard, with being above or below that as a line of demarcation, do you have a mental framework for what you expect insurance businesses to grow organically? Aaron Cohen Yes, I believe it’s inflation plus. Don’t ask me plus what. But for us, what we’ve seen—especially since we’re always talking P&C right now, property and casualty insurance—is that the other thing driving it, besides inflation, is social inflation. Inflation, of course, is just the underlying result of your assets being worth more, your business and services growing. Social inflation is a very nice word for large jury verdicts. If you’re going to insure a bunch of trucks—and I keep using that example because we’ve done a lot of trucking in the past—and you get a fender bender and someone hurts their neck, all of a sudden a jury awards that person $20 million. They didn’t have to take off more than 2 weeks of work, and these jury verdicts are getting enormous. I think juries are being more sympathetic to consumers relative to the big, bad companies. So you have social inflation that’s really impacting the industry. The other thing that’s growing premiums, which isn’t great, is new risks. There’s cyber risk. How do you price that? That’s a whole new industry being brought into the insurance sector. Then, if you’re underwriting schools, there’s crime in schools. If you’re underwriting an office building, we see these horrible, horrible tragedies that went on in Manhattan yesterday that are unspeakable. But from a business perspective, if you’re insuring those people and that risk, the price is going to go up because these things are happening. Those are the things, unfortunately, that are driving this industry to grow a bit faster than inflation. Matt Reustle Yes. Acknowledging the dynamics that are causing it and putting those to the side to focus on the impact that would have for an insurance brokerage business, is it right to think that if premiums are growing, the brokers are capturing a percentage of those premiums, and therefore that is top-line growth? Is that the most simplistic way to think about it? Aaron Cohen That is fair, and that’s for the small and midsize world. I’d separate that from the Fortune 500. They have really smart actuaries and insurance experts determining what type of insurance they need. They’re going to the large broker houses and paying a fee, and the broker house is getting a fee. The traditional mid-market, middle-market, and so on, P&C world, where private equity has been incredibly successful for the last 20 years, is commission-based. Yes, as premiums go up, the revenue of that insurance broker goes up. It’s a wonderful business because we don’t have to ask our clients for raises. We don’t have to change our price. We just get a percentage of the premium paid by the carrier back to us. Matt Reustle Out of curiosity, is there a threshold where you move from the percentage to the fee? Is there a number that’s involved there, that you have mentally? Aaron Cohen There’s not a number, but it’s big. If you think about any type of growing business, with a management team and a board of directors trying to set strategy and allocate capital, you have to be pretty big to say, “For the next $5 million, I want to build an insurance department at this organization.” So it’s truly the largest of the largest corporations. Matt Reustle And you mentioned some of the new risks coming into the system. One of the things that I often think about is cybersecurity, whether it’s the trend line of what’s happened in the cloud or now AI. It’s something that, in theory, should be more and more in focus going forward. Does that category fall under this bucket as well? Does it tuck into a large insurance broker’s operations, or would that sit outside? Aaron Cohen No, this absolutely tucks into all the insurance brokers that we’ve been talking about today. If you have a business, you need cyber insurance. Absolutely. The irony is that this is the first type of risk that I believe is very different from any other risk in insurance, which is why it’s really hard for carriers to underwrite it. I love talking about this, and I get up on a bit of a soapbox. Most other risks that you think about—property damage, slip and fall, and so on—are done once the carrier or the insurance broker hears about the risk and the event. It’s behind you. The fire happened, your manufacturing facility burned down, and it’s done. Cyber is real-time. You call your insurance broker or your carrier and say, “Someone is in our systems. We’ve had a breach.” Carriers, who obviously have to minimize their loss exposure, have to be proactive and prepared to move very quickly to help the insured exit or end this breach situation. It’s a very different risk from any other risk this industry has ever seen, which is why people are struggling with underwriting it and pricing it appropriately. You’re seeing some carriers have pretty adverse loss ratios because it’s a very, very different outcome from any other risk in this industry. Matt Reustle I think, again, it proves your point on why brokerages are the interesting niche within this space. You don’t have the carrier underwriting risk that sits on your balance sheet, but you still get to capture the upside of the growing market. That probably came across in all of your previous answers, but just to spell that out again, I think that one certainly proves the point. Aaron Cohen Yeah, I mean, the best part about this industry—insurance brokerage—is that insurance brokers do not take risk. Of course, people could argue that, over the long term, if they keep placing bad risks with the carrier, the carrier may cut them off. But that would be adverse selection, which you don’t see. If you have general loss ratios consistent with the industry and other brokers that are placing premium with that carrier, you are not taking any risk. I mentioned it earlier: I do believe in insurance and broader financial services that if you own that customer relationship, you should increase your percentage of the ecosystem profits that you derive. That’s because you’re helping the insured decide what carrier to go with. What’s interesting about that is that, if you think about it, most people—and when I say people, I’m talking about businesses, but people as well—don’t really care who their insurance carrier is. As long as they’re A-rated and known to pay claims, they’re happy to go with any of the top, wonderful carriers out there. So their broker has a tremendous, tremendous impact on their decision. When you think about an insurance carrier, they’re large companies. They’re capital-intensive, and that’s really what drives their value proposition. They bring capital, and capital is a wonderful thing, but it is a bit of a commodity. Sometimes it’s more scarce than others, and commodities don’t get the same value proposition as driving customers to decisions. That’s the difference between brokers when you get down to the profitability metrics. Matt Reustle And I think EBITDA margin, to your point—EBITDA translating to free cash flow—I would imagine that is the metric that tends to get a lot of focus. What does that range typically look like for these businesses in terms of somewhat mature insurance brokerages? How much variance is there from one operator to the next? Aaron Cohen I think the financials of these brokers of similar size are very similar. Their EBITDA margins are all within a couple hundred basis points of each other. That difference usually is organic growth. You can look at that over the course of the last 20 years. A broker with 3% higher margin probably has 1% less organic growth, but they are very similar within bounds. Of course, as they get larger, they do have the ability to increase their margins because there are scale advantages and operating efficiencies. Matt Reustle Is there a range, out of curiosity, that you could put numbers around? Aaron Cohen Just EBITDA margins, Matt? Matt Reustle Yeah. Aaron Cohen A solid insurance broker could be in the range of 28% to 35%. That’s certainly healthy when you factor in what that means for free cash flow. Matt Reustle In terms of the investments or anything below the line that would be required, putting aside leverage and the capital structure, what would go into other investments that need to be made, whether it’s now or in the future, that you think about as an investor? Aaron Cohen There are not large capital requirements in this business. This is very, very clean cash flow. Besides capital structure, it’s really just CapEx, which is a few percent of revenue, growing a little bit faster than top line, probably because people are investing in technology, data, and efficiencies. But it’s a really, really clean business, and that’s why everyone’s done very well in this industry and it’s traded so well for so long. Matt Reustle How do you view it? To your point, I think we've laid out why the private-equity market would love this particular subsector, and I would imagine that's brought in more competition for you in your seat. What does that look like, and how do you think about the go-forward in terms of the opportunity set here to find these businesses and to continue the playbook? Aaron Cohen We have seen valuations grow pretty dramatically over the last 25 years. I think it's a result of a few different things. One is that, before the financial crisis, insurance brokerage was not viewed that favorably by public-market or private-equity investors. They viewed it as an industry where business was done on the golf course and there wasn't much value proposition there, and people were just wrong. I think the world saw that during the financial crisis, when every other industry in the financial services world got decimated—I’m being dramatic to prove a point—and insurance brokers grew. They grew, and I think it put a spotlight on the industry. That brought in more competition and more capital. Then, what we've talked about earlier in this call is that, pre-financial crisis and before the turn of the century, a lot of the brokers were small, so they could not drive premium valuations because they couldn't drive their price, even though they don't set price for the customer. They do set their commission rates with the carriers, and if the carriers didn't have large brokers that they were relying on to bring books and books of business to them, they didn't have to pay them much. So, one, the spotlight on how this industry performs and, number two, the fact that as they got bigger, they were able to increase their commission rates either through variable or fixed commissions, showed that this is an industry worth investing in. The private-equity industry entered this industry, and then we went on a run of 20 years of low interest rates, which obviously helps when you're doing M&A if you can borrow very cheaply to buy these wonderful assets. We've seen valuations maybe double in the last 25 years. I'd say, pre-financial crisis, this industry traded at 8.5 times, and now great brokers and the public brokers trade at 17, 18, or 19 times. I think it's driven a lot by the cash-flow characteristics of this business. Everyone understands the recurring-revenue nature of this business and the M&A opportunity. There are very few industries that have such a plethora of M&A opportunities. What's amazing is that this industry is still fragmented, and there are still thousands and thousands of brokers for people to buy and get those synergies and that operating leverage. The funny thing now is you're seeing old brokers who have sold run out their noncompetes and start new businesses. So, this industry still has a long way to go to get truly consolidated like we've seen in other industries, and there's still tremendous opportunity for value creation for investors. Matt Reustle This somewhat overlaps with that question and answer, but you have a very interesting example with AssuredPartners, a business that you invested in, exited, and then got back involved in and have since made announcements. Can you talk a little bit about that, particularly the initial exit and then investing back into the business again, how that comes around, and whether that is symbolic of the way that things can continue to operate in the future? Aaron Cohen Of course, but I'm going to correct your semantics, Matt, on one point: We didn't invest in AssuredPartners; we started AssuredPartners. We formed that company. Matt Reustle Okay, yes. Aaron Cohen I'll go back to our leader strategy, which is that we look to meet great CEOs, build relationships, and find assets to buy or build with them. Jim Henderson is the quintessential example of a leader-strategy CEO. We built a relationship with Jim because he was on the board of another insurance business. We were invested in a carrier called Ironshore. Jim is a legend in this industry. I've never met a CEO more well-liked, because when you're a hard-nosed CEO, you always cross some people—not on purpose. Jim is the ultimate gentleman, and he's been incredibly successful. His reputation preceded him. When he joined the board of Ironshore, my partner and I would change seats at dinner to be able to sit next to Jim. We built a relationship with Jim over time, and after a couple of years, he was looking to do something different. He called us down to Orlando, where he lives, and we literally built the AssuredPartners idea on the back of a napkin in his backyard. It's straight out of a movie. Jim and our team formed AssuredPartners. GTCR committed several hundred million dollars to Jim to build this company. Obviously, Jim had been in the space for 30 years, so he knew the entire industry, both the people and the target acquisitions. Our goal was to build an insurance broker with him, and he wanted to learn from what he did in his career and build a better broker, all about clients and brokers. That was our goal. With someone like Jim, everyone was dying to work for him. So, before we even owned an asset, we had about 6 people on the payroll that we were funding with equity: a president, a head of M&A, and a CFO, because everyone wanted to work for Jim. We were just burning cash until we found a platform. We're not a venture-capital firm, so we didn't say, “Go hire producers and start writing your first piece of business.” We were looking for a platform, and our first platform was a company called Neace Lukens in Cincinnati, Ohio. It was a small business, but it was big enough that it had some basic infrastructure and the ability for Jim to professionalize the business, and we went off. That is the quintessential GTCR story: Find a great CEO and a management team. Find a business, and bring that team in to run the business. At the time, Neace Lukens was a very small business, but the management team we brought in was used to running billion-dollar businesses. On top of that, people wanted to sell. People wanted to work for Jim. I wouldn't say we were getting a discount, but we were winning ties because people wanted to be part of what Jim was creating. So, we built a wonderful, wonderful business over 5 years. Unfortunately, in private equity, we do have to sell our businesses, even our great ones. That being said, at GTCR, we like to own businesses longer than the industry average. We were coming up on our 5-year anniversary, and we were more than 3 times ahead of our back-of-the-napkin plan. Our goal was to get to $40 million of EBITDA in 5 years. Like I said, we were well in excess of 3 times that. We were excited. We spent so much time finding the right people, investing in the technology, and investing in growth that we wanted to keep on compounding. Frankly, Jim, who was a wonderful partner, said, “I recruited all these people. I promised them that in private equity, they were coming to work for me for the equity—the equity side of private equity—and we owe them a payday.” So, we sold the business, and it was a wonderful success and one of the best deals in our fund. Of course, we stayed in contact with Jim. Jim is a personal friend at this point, and we were staying in touch. I remember I was walking through Disney World. My kids were young then, and Jim called me up and said, “Let's do it again.” I said, “Jim, do what?” He said his current sponsors wanted to sell and that we should work together again. At GTCR, that's the best phone call you can ever get: when a CEO wants to work with you again. If you think about private equity—and get into a little geeky finance—risk and reward are correlated. Our biggest risk, especially as you hear us talk about the leader strategy, is finding a CEO where you think you're well aligned, putting them in a business, and then realizing you're not well aligned, so you have to change management and deal with all the leakage that comes with that. That doesn't happen often, but that is a risk. Here, we've worked together. We've seen eye to eye. We understood the strategy we wanted to continue to execute. So, all of a sudden, we had asymmetric upside because we had the same reward potential with a significant risk chopped off the other side. We were very excited. We partnered with Jim and the management team to rebuy the business almost 6 years ago, and now we've built it to over $1 billion of EBITDA into a wonderful, diversified, specialty-focused business. It was announced last November that we're selling the company to A.J. Gallagher, just one of the absolute role models in the middle-market insurance brokerage space and a family we have tremendous, tremendous respect for. Matt Reustle That's an incredible story that really encapsulates all of the higher-level investment frameworks, along with the nuance of the industry. I love hearing that and spelling out the details on the point of the exits, which you need to think about as the scale becomes bigger. Certainly, in private markets, there are various chapters where I know some smaller-market private-equity folks look and try to build businesses that they can sell to the middle market. Once you get up to the size and scale that you operate in, it becomes a bigger challenge, or there are fewer natural buyers. So, how do you view the opportunity set for when you're exiting, whether it's finding strategic public companies that could potentially be buyers or IPOing? I'm just curious how you think through those opportunities and evaluate them. Aaron Cohen Matt, I think you're talking about exits for much larger platforms—hundreds of millions, even billions of dollars of EBITDA—and I do think there are exits for those larger businesses. I appreciate you recognizing we're doing bigger deals, but at GTCR, we still love doing what we've always done, which is small buy-and-builds and consolidations in industries. We do have a fund that allows us to do smaller deals as well, because we have a flagship fund, and then we have a strategic growth opportunity where we are able to do smaller deals as well. To your question, Matt, I think there are a couple of different paths for liquidity or exits for these larger brokers. First, if you think about many other industries, they all consolidate at the top. There are very few industries where there are 7 mega players. This is an industry where there are probably 5 to 6 players with $1 billion-plus of EBITDA, and probably another 10 players with $500 million-plus of EBITDA. I would expect the big players to consolidate and still get all those synergies of what you would normally see in larger transactions of that size. Second, I do believe there are large strategics that still love the middle market and would be willing to do larger transactions. That being said, there aren't that many, and there aren't enough large public strategics to buy the next 15 largest private companies. So, lastly, you're talking about potential IPOs. This industry, as we've talked about, has performed incredibly well for public investors, and you should expect to see a handful of private equity-backed insurance brokers go public over the next couple of years. Matt Reustle We've talked a lot about what makes this a very special industry. When you think about the risks, what stands out the most to you as a risk that could be on the horizon, or that you look for in the operational results? What tends to stand out the most for you? Aaron Cohen I hate when people talk about investments and don't identify risks or ways to lose money, because you could do that in any industry. But what is wonderful about this business is—and I'm going to go back to the diversification—we always used to laugh with Jim. If we lost our largest customer, Jim wouldn't call us because Jim wouldn't know, because your largest customer is way less than 1% of revenue. There's not a risk out there where I look at AI and say, "That could take down this industry." Can it make it more efficient for the carriers? Can it make it more efficient for the brokers? Yes. Insurance is one of the oldest industries in the world, and on the insurance brokerage side, I don't see something that would fundamentally change the industry. You could have years of slower growth. We didn't talk about the insurance cycle, which is hard and soft markets based on capital availability and carriers' profitability. You could have several years of a soft market where premiums are coming down and, therefore, your commissions are coming down. That would slow your growth and impact your cash flow generation. Now, you would hope in that environment, which we've seen before, that tuck-in acquisitions would probably get a little bit cheaper. There have been years of soft markets where the results aren't as strong as you'd like to see, but there is not an esoteric risk that is going to bring down this industry or fundamentally change its structure. Matt Reustle Just on the soft markets, is that typically tied to macro cycles? Is there something else that drives a slowdown? Aaron Cohen We've done a tremendous amount of work, and sometimes soft markets have correlated with soft economic times, but it's not always the case. They're not perfectly correlated. What really drives them is insurance carriers' profitability. The one most important thing to identify a potential hard or soft market is—forget about carriers' revenue—their profitability, their net income, and their cash flow. When carriers have positive cash flow, they're happy and they're generating returns. It's when they dip into negative cash flow that you'll see the market harden, because they've got to push rates to drive returns. So, cash flow is the number one predictor of a potential hard or soft market, along with the insurance industry's profitability. Yes, it's underpinned by the overall economy, but you could have 2 horrible storms—you could have an earthquake in California and a hurricane in Florida—in the worst economy in the world, and all of a sudden prices are going up. Insurance brokers are going to make more money because they get a percentage of that premium. There are risks that are independent from the broader global macroeconomy that would drive a hard or soft market. Matt Reustle Very interesting. The last thing that I wanted to touch on, which you brought up earlier, was that it's a highly regulated industry. It seems like the impact for the brokers is mostly on filings and whatnot. But in terms of regulation, as either a risk or a potential catalyst and tailwind, is there anything out there that would directly impact the brokers from a regulatory standpoint that you're watching closely? Or is there a milestone that's upcoming that you would be looking out for? Aaron Cohen There's nothing on the horizon that's being discussed, whether at the state or federal level, that people are worried about. You had the whole Spitzer situation back in the pre-financial-crisis period that really shook this industry, but right now it's pretty well regulated. It works very well. I think an advantage of being a slightly bigger broker is that you have the ability to track the regulations and grow by state, because it's regulated by the state. Every state is different, and you have the capital to support having a regulatory team to follow the regimes and understand what's going on. But there's nothing on the horizon that's material to this industry right now. Matt Reustle Well, Aaron, this has been a pleasure. Thank you for sharing all the knowledge, the history, and some fun stories along the way. I appreciate you joining us. Aaron Cohen Matt, thank you for having me. It was a lot of fun.