Better pricing, prudent underwriting, rising demand for insurance products and global expansion have been driving revenues of Zacks Insurance Brokerage industry players. The fast-paced consolidations in this traditionally fragmented industry are expected to benefit Marsh & McLennan Companies MMC, Aon plc AON, Arthur J. Gallagher and Co. AJG, Willis Tower Watson plc WTW and Brown & Brown Inc.BRO.
Increasing adoption of technology and higher spending on technology will help in the smooth functioning of the industry.
About the Industry
The Zacks Brokerage Insurance industry comprises companies that primarily offer insurance and reinsurance products and services. Insurance brokers act on behalf of their clients and offer advice, keeping in mind clients’ interests, against brokerage fees. Thus, their business is directly linked with clients’ level of business activity. Some of these companies are also involved in providing risk management, third-party administration, and managed health care services. Per a report by Allied Market Research, the global insurance brokerage market is projected to grow $395 billion by 2027 or at an eight-year (2020-2027) CAGR of 7.3%. Research Dive estimates industry players combined to generate $515.3 billion in revenues by 2028 at an eight-year (2021-2028) CAGR of 5.4%. Increased digitization has been helping in improving operational performance.
3 Trends Shaping the Future of the Insurance Brokerage Industry
Increased Demand for Products to Drive Revenues: Industry players are continually expanding globally, cross-selling products, increasing rates, tightening underwriting standards, and controlling expenses. Growth in the aging population is driving demand for retirement benefit products while the rising population of baby boomers and millennials as well as increasing awareness is boosting demand for medical insurance, life insurance, accidental insurance, and other forms of insurance. The operational results of the industry players are affected directly by clients’ level of business activity, which, in turn, depends on the extent of economic activity in the industries and markets that they serve. Per Deloitte Insights, The Swiss Re Institute projects an increase in demand for insurance, which, in turn, will drive a 3.9% increase in premiums in 2022.
Mergers and Acquisitions: The insurance brokerage industry is witnessing fast-paced consolidation. The industry has been traditionally fragmented with a number of small players. One of the factors driving mergers and acquisitions is the companies’ need to become specialized in their businesses. Some other factors driving M&A are the interest shown by private equity firms in this sector, growing competition, and lack of organic growth.
Increased Adoption of Technology: To maintain competitiveness in the industry, players are embracing technological change. The threat comes from new entrants, including technology companies like Insurtech, start-ups, and others. These players are focused on using technology and innovation, including artificial intelligence, robotics and blockchain to simplify and improve client experience, increase efficiencies, alter business models and bring about other disruptive changes in industries in which the existing players operate. Accelerated digitalization is also helping in curbing costs, thus aiding margin expansion. Increased digitization will help in faster claims processing, thus improving operational performance and improving retention rate. While investments in technology help increase business efficiency, the expenses associated with such investments increase operating costs.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Insurance – Brokerage industry is housed within the broader Zacks Finance sector. It carries a Zacks Industry Rank #103, which places it in the top 41% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, signifies solid near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are upbeat about this group’s earnings growth potential. The industry’s earnings estimate for the current year has moved up 4.4% year to date.
Before we present a few insurance broker stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Underperforms S&P 500 but Outperforms Sector
The Insurance Brokerage industry has underperformed the Zacks S&P 500 composite but outperformed the Zacks Finance Sector over the past year.
The industry has lost 7.1% compared with the S&P 500’s decrease of 1.5% and the broader sector’s decline of 7.4% in the said time frame.
One-Year Price Performance
Industry’s Current Valuation
On the basis of the trailing 12-month price-to-book (P/B), which is commonly used for valuing insurance stocks, the industry is currently trading at 6.05X compared with the S&P 500’s 5.8X and the sector’s 3.03X.
Over the last five years, the industry has traded as high as 7.07X, as low as 4.22X and at the median of 5.74X.
Trailing 12-Month Price-to-Book (P/B) Ratio
Trailing 12-Month Price-to-Book (P/B) Ratio
5 Insurance Brokerage Stocks to Keep an Eye On
We are presenting one stock from the space currently sporting a Zacks Rank #1 (Strong Buy) and four stocks carrying a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.
Arthur J. Gallagher: Rolling Meadows, IL-based Arthur J. Gallagher provides insurance brokerage, consulting, and third-party claims settlement and administration services in the United States, Australia, Bermuda, Canada, the Caribbean, New Zealand, and the United Kingdom. This Zacks Rank #1 (Strong Buy) insurance broker should gain from organic growth at its Brokerage and Risk Management segments.
The Zacks Consensus Estimate for Arthur J. Gallagher’s 2022 EPS indicates a 48% increase year over year, having moved up 9.4% over the past 30 days. AJG delivered an earnings surprise in each of the last four reported quarters with the average being 6.52%. The expected long-term earnings growth rate is pegged at 10.4%.
Price and Consensus: AJG
Willis Towers Group: London-based Willis Towers Group is a leading global advisory, broking and solutions company and carries a Zacks Rank #3. Willis Towers Watson should benefit from increasing organic commissions and fees, solid customer retention levels, and growing new business.
The Zacks Consensus Estimate for Willis Towers Group’s 2022 EPS indicates a 17.9% increase year over year, having moved up 0.4% over the past 30 days. WTW delivered an earnings surprise in each of the last four reported quarters with the average being 14.30%. The expected long-term earnings growth rate is pegged at 16.2%, better than the industry average of 11.18%.
Price and Consensus: WTW
Brown & Brown: Daytona Beach, FL-based Brown & Brown markets and sells insurance products and services in the United States, England, Canada, Bermuda, and the Cayman Islands. This Zacks Rank #3 company is poised to benefit from strategic acquisitions and mergers as well as investments to boost organic growth and expand margin.
Brown & Brown beat estimates in each of the last four reported quarters with the average beat being 12.14%. The Zacks Consensus Estimate for 2022 EPS indicates an increase of 4.1% year over year.
Price and Consensus: BRO
Marsh & McLennan Companies: New York-based Marsh & McLennan provides advice and solutions to clients in the areas of risk, strategy, and people worldwide. This Zacks Rank #3 company is well poised to grow on significant investments and acquisitions made within its operating units, product launches, enhanced digital capabilities, and new businesses.
Marsh & McLennan delivered a four-quarter average earnings surprise of 13.45%. The Zacks Consensus Estimate for 2022 earnings indicates a 10.5% year-over-year increase and has moved 1.9% north in the past seven days. The expected long-term earnings growth rate is pegged at 8.6%.
Price and Consensus: MMC
Aon: Dublin, Ireland-based Aon offers risk management services, insurance and reinsurance brokerage, human resource consulting and outsourcing services worldwide. Divesting non-core operations to streamline its business and deepen its focus on more profitable operations, thus generating a higher return on equity and cost-curbing measures bodes well for growth. Aon has an impressive inorganic story mainly aiming at expanding health and benefits business, flood insurance solutions, and risk and insurance solution operations.
This Zacks Rank #3 insurance broker delivered an average earnings surprise of 9.98% in the trailing four quarters. The Zacks Consensus Estimate for Aon’s 2022 earnings indicates a 9.9% year-over-year increase and moved 0.3% north in the last 30 days
Price and Consensus: AON
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