Briefing by content director Saxon East
What do Giles, Oval, Heath Lambert and now Stackhouse Poland all have in common? They are all major Insurance Times/IMAS Top 50 brokers swallowed up by Gallagher this decade.
Thousands of staff across the UK have joined Gallagher, and those with stock have been richly rewarded with a share price tripling from $22 in 2010 to $73 today.
What’s interesting is the extent to which Gallagher is throwing off cash, which provides a strong basis for its acquisitive appetite.
The graph below shows how Gallagher’s free cashflow has grown healthily over the last five years.
Free cashflow can be defined in different ways, here it is net operating cashflow minus capital expenditure.
This strong basis has allowed Gallagher to balance its capital structure by raising total debt from $1.46bn in 2013 to $3.13bn in 2017, another source of funding for acquisitions.
What this ultimately shows is when the formula is right, insurance broking is a good business to be involved in, something not lost on private equity.
Why? For mature brokers, there is only moderate capital expenditure.
Meanwhile, working capital movements are quite manageable as there is no physical stock and customers should reliably pay on time and frequently in advance.
Another plus, is that retention rates in commercial broking are high, helping sales to remain consistent.
Of course the drawback is that with such high retention rates, it can be a challenge to grow organically. But then if you are cash rich, with debt and equity options for further financing, it makes sense to make acquisitions like Gallagher has been doing.
The fragmented UK market provides a fertile ground for Gallagher.
With their scale, Gallagher can add expertise while also potentially expanding margins by stripping out duplication, using technology and getting enhanced deals from insurers.
Paying anywhere between £200m and £300m is comfortably within the Chicago broker’s financial health.
For UK commercial brokers with a decent size and good culture, this is all music to their ears. Happy days indeed.
No comments yet