Video Transcription
George Bucur: Welcome back. I’m George Bucur, managing director and co-head of MarshBerry specialty practice. Today we return with you with Max Saffian from Fortress Investment Group. We’ve been exploring the debt markets and how they’ve been transitioning over the course of the last year, and more specifically how they are impacting insurance distributors when it comes to valuation, M&A (mergers and acquisitions) activity, and overall capital availability from the debt markets. Today, we’re going to continue that conversation with Max, and we welcome you back.
I think that makes a great segue into why is insurance different, right? We’ve heard of other industries that aren’t even able to get debt leverage at all, but from your perspective, one why is insurance different, and also what’s the outlook for the next, you know, quarter or so in regards to the overall industry and from a financial perspective, your view on it?
Max Saffian: So, I would say, you know, from the standpoint of an industry or a company, you can’t help where the risk-free rate is, right; that’s out of the industry’s hands, so you just sort of have to live with that. I think the quality of this vertical, or segment, within the sort of broader lending market, it’s clearly outperformed close to really everything else we look at. You know, you think about higher inflation tends to mean rates go, sort of—higher inflation generally means, you know, pricing goes higher on the underlying premiums. You know, things like geopolitical risks tend not to have, you know, real issue. I mean that’s something at the forefront. You know, even the slowdowns that we’re potentially seeing in the economy, you know we can go back and track organic growth rates for the public names in 2008 and 2009. I think it was Brown & Brown and Gallagher were both public at the time. And I think I’ve seen in MarshBerry work as well, is organic growth is down maybe 1%, 2% during the absolute worst of, you know, the economy that I think anyone on this podcast has really ever seen. And what that means is that I think, you know, when we internally talk about insurance brokerage, I think we just see this as a much better business to lend to, and I don’t think Fortress is any different than anyone else around this as a place where you want to put capital. So, I don’t have a crystal ball, but using MarshBerry as a great resource, but also being a lender to a number of these same companies you guys bank, and looking at where the public companies have sort of talked about 2023. It feels like organic growth is kind of in this 5%, 6%. 7% rate, with maybe two-thirds of that coming from rate and a third of that coming from exposures. And when you put that against healthcare, or retail, or anything tied to commercial real estate, or some of these other businesses, that just really shines, and I think will always provide sort of a cornerstone of capital for this industry.
Bucur: I think you very well-articulated the resiliency of the insurance segment and frankly, the low beta nature of it, meaning it’s not that cyclical when you compare it to that of the economy. I think that’s very well articulated. So, thank you for that.
I want to shift gears a little bit because there’s been, I don’t know if noise is the right word, some people label it a crisis in the banking side of things given Silicon Valley Bank, Signature Bank, and what we saw with Credit Suisse. But all in all, those are generally I’d say catering to more of your probably more regional and or operating type banks within the U.S. We’ve heard a lot of again developments as of late, the Fed coming out and saying they expect a recession in the back half of this year. We had positive developments on the inflationary front, with inflation coming down in March compared to maybe what expectations were. And if you take all this into consideration with the backdrop of the issues on the banks, for example again, Silicon Valley and Signature, do you expect that to have any meaningful impact in regards to debt availability for the insurance distribution segment?
Saffian: Yeah, you know, I think the answer is sort of twofold in terms of there’s the macro and then sort of the micro, right? I think bank failures, especially on the size of Silicon Valley Bank, that’s never good for an economy. And I think the regional banks’ deposit rates having to go higher to compensate people for keeping their money there is clearly not a good omen for lending in general. You know, some of the commercial real estate issues we’ve seen pervade these banks also makes it difficult. So, I think, when you look out over the 2, 3, 4, 5 years, you know, there will naturally be a constriction in lending, especially from regional banks. I just think there’s so much pressure kind of on the liability side that there’s no way that isn’t going to affect the asset side.
You know, how much of that slack gets picked up by larger banks like JPMorgan, BofA (Bank of America), PNC, that are effectively—those deposits aren’t going under peoples’ mattresses, they’re just moving from smaller regional banks to the larger banks. And I think those banks will be happy to lend to good businesses and will frankly need to put that money out to good businesses.
Which leads to the micro, which is, in the context of sort of the broader economy, I think commercial banks probably look at this the same way lenders like Fortress do which is: this is where you want to be lending to. I think the overall trend will be sort of constriction in lending markets, however I think within that, our industry will likely outshine some of the others. I think, you know, what they call sort of the shadow lending or direct lending businesses like a Fortress or Gallup, or any of the other lenders who have, you know, effectively financed these large platforms. I think there has been a lot of capital raised and a lot of focus on this industry so while we might see some movement from commercial banks to sort of a direct lender, or a nonregulated bank, I think that capital is still there. So, you know I think it probably is on the smaller side than on the larger side, but it feels like macro grow harder, but you know micro should outshine. So, it just sort of depends on the interplay between the two.
Bucur: Excellent, and I would assume, given the characteristics of insurance and the fact that most of the lending we’re getting are from established organizations not necessarily regional banks but established firms such as Fortress, that once the overall capital markets start to become– thaw, if you will– insurance is probably going to be the first area where we experience that, and we would hope that again that would correct first in the capital markets perspective at this level.
Saffian: Yeah, I mean we’ve already sort of seen it, you know. Capital markets are backed up, and we haven’t seen a ton of M&A. But the Truist deal, selling 20% of their insurance brokerage to Stone Point, I think that that shows that this business is alive and well. We could look at where the public names trade, and they kind of trade in a 15 to 17 times EBITDA (earnings before interest, taxes, depreciation, and amortization) band, which supports leverage in 5, 6, 7 times for sure. And on the larger buyers the Acrisure, HUB, and the USI’s still have easy access to capital markets. And again, I think there is a large bid for those loans at very competitive prices. Again, you can’t help the risk-free rate, right? So, if those lenders were able to raise debt at L300 versus some of the middle market platforms that are closer to L500 or L 600, that L300 hasn’t changed, but that L has gone from 1% to 4.5%. So even USI and HUB are still forced to raise at 7.5% versus 4%.
Bucur: Yes, I understand. And to your point, frankly, when it comes to M&A activity, we saw the first quarter of 2023 actually higher than 2022, and largely valuations have held consistent really from 2021 through today. There are messaging from buyers that there might be capital constraints or concerns, and that will I think will largely play out as we see what happens in the debt markets over the next 6 to 12 months. But it sounds like generally speaking, we’re in a pretty good spot, and once the market starts to thaw –starts to loosen up– insurance is likely to see the benefits of that sooner than most other industries.
Max, I want to thank you very much. This is a topic that’s very important to not just the buyer community, but also the independent operators in terms of how their valuations are being impacted by the debt markets and the overall buyer community. And largely it sounds like it’s still open for business on the M&A front and the debt lending side, which is very important.
I also want to thank Max and Fortress for their time. Again, Fortress focusing on the financial services segment has a strong position within insurance distribution, largely 20 million in north when it comes to lending opportunities, and has been a trusted partner of MarshBerry’s. So, everyone thank you for your time. Max, thank you for your time, and I wish everyone to be well.
