After four years of euphoria - the combined result of a shortage of new capital in the industry, strong demand, a relatively benign period in terms of major catastrophes, and of course rising interest rates - the entire insurance sector is bracing for a cyclical reversal.
While insurers' valuations remain at record highs, causing alarm amongst some observers, those of brokers - despite a significantly less risky business model - have already taken a hit in anticipation of the looming contraction.
On the surface, Brown & Brown reported sensational quarterly results yesterday - with revenue up 35.4% compared to the same period last year and net income up 28.7% - although these stem entirely from the acquisition of Accession Risk Management Group, as organic growth was nowhere to be found.
This nearly $10bn transaction was notably funded by a capital increase of over $4bn. Fully aware of its situation, Brown & Brown used its stock as currency, considering it was generously valued at a multiple of 30x earnings just as a cyclical inflection point was clearly emerging.
MarketScreener analysts estimate that Accession was purchased at precisely 30x its own earnings - a necessity given the strategic dimension of the deal. It is worth noting that on the stock market, the acquirer's own valuation has fallen back to a multiple of 20x earnings, effectively returning to its historical average.
Brown & Brown has hitherto been a relatively shrewd acquirer, successfully ensuring genuine value creation through its various external growth operations. In the absence of short-term organic growth prospects, it may have to rely solely on this pillar to justify its multiple.
The valuation adjustment is therefore legitimate in every respect. Furthermore, there are strong suspicions that it precedes a comparable adjustment amongst major insurers.
