Firming pricing and an improved economy have combined to create a stable outlook for U.S. insurance brokerages in 2013, although future acquisitions growth might be constrained as a result, according to a report by Fitch Ratings.
“Reported and organic revenue growth for five publicly traded insurance brokers remained positive in the first nine months of 2012, continuing a favorable trend that has followed a positive inflection point in 2011,” Fitch said in its 2013 Outlook: U.S. Insurance Broker Industry. “Fitch attributes this favorable trend to pricing improvement in many business lines that has boosted commission-based revenues for insurance brokers...
“Fitch expects this positive momentum to continue in 2013, particularly in lines affected by significant expected losses from Hurricane Sandy, which made landfall in the northeastern U.S. in October 2012.”
An improved economy has also aided larger U.S. brokerages that have added consulting practices to supplement their insurance operations, the report notes.
“Notably, MMC (Marsh & McLennan Companies Inc.), Aon (Aon plc), and, to a lesser extent, AJG (Arthur J. Gallagher & Co.) all have consulting businesses of significant size that complement their core insurance brokerage businesses,” Fitch said. “These businesses typically operate at lower margins than their core insurance and reinsurance broking businesses.
“While these consulting services are not closely correlated with the insurance pricing cycle, they are highly sensitive to economic activity and were unfavorably affected by the troubled global economic environment that has persisted for several years," the ratings agency said. "With many global economies now reporting at least tepid economic growth, Fitch expects that the consulting businesses of these firms should be able to sustain the recently stronger revenue growth and improved margins.
Therefore, Fitch expects that consolidated profit margins could improve incrementally in 2013 and beyond.”
Fitch predicted that acquisitions in 2013 would be “moderate, but active,” with a key damper being that the firming market would create more organic growth opportunities.
“In 2013, Fitch expects that brokers will continue to supplement mid-single-digit organic revenue growth through selective acquisitions,” Fitch reported.
“Factors suppressing acquisition activity include the still-challenging global economic environment combined with a firming property/casualty insurance market that has boosted brokers’ organic growth opportunities. Moreover, several brokers are still in the process of integrating prior acquisitions."
