4 Insurance Brokers to Watch Despite Industry Challenges
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 AJG and Ryan Specialty Holdings, Inc. RYAN.
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 healthcare services. Per a report by Allied Market Research, the global insurance brokerage market is projected to rise to $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, rising at an eight-year (2021-2028) CAGR of 5.4%. Increased digitization has been helping to improve 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. Government initiatives should also add to the upside. 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 they serve. Also, they must design customizable products that are more appealing to customers. This apart, better pricing ensures higher commissions for the industry players.
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 insurtechs, 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. At the same time, players must shield themselves from falling prey to cyber threats.
Zacks Industry Rank Indicates Weak Prospects
The Zacks Insurance - Brokerage industry is housed within the broader Zacks Finance sector. It carries a Zacks Industry Rank #160, which places it in the bottom 36% 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 bleak 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 bottom 50% of the Zacks-ranked industries is the result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are doubtful about this group’s earnings growth potential. The industry’s earnings estimate for the current year has moved down 2.4% since April 2022.
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 Outperforms Both S&P 500 and Sector
The Insurance Brokerage industry has outperformed the Zacks S&P 500 composite as well as the Zacks Finance Sector over the past year.
The industry has risen 6.7% against the S&P 500's decrease of 6.9% and the broader sector’s decline of 4.9% 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 6.66X compared with the S&P 500's 5.52X and the sector's 3.55X.
Over the last five years, the industry has traded as high as 7.98X, as low as 4.22X and at the median of 5.98X.
Trailing 12-Month Price-to-Book (P/B) Ratio
Trailing 12-Month Price-to-Book (P/B) Ratio
4 Insurance Brokerage Stocks to Keep an Eye On
We are presenting two stocks from the space currently carrying a Zacks Rank #2 (Buy) and two Zacks Rank #3 (Hold) stocks. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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 #2 company is well poised to grow on significant investments and acquisitions made within its operating units, product launches, enhanced digital capabilities and new businesses. It has a VGM Score of B.
Marsh & McLennan delivered a four-quarter average earnings surprise of 3.20%. The Zacks Consensus Estimate for 2023 and 2024 earnings indicates a respective 8.3% and 9.1% year-over-year increase. The expected long-term earnings growth rate is pegged at 8.5%. It has a Growth Score of A.
Price and Consensus: MMC
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 #2 insurance broker is expected to gain from organic growth at its Brokerage and Risk Management segments.
The Zacks Consensus Estimate for Arthur J. Gallagher’s 2023 and 2024 EPS indicates a respective 13.2% and 12.1% increase year over year. AJG delivered an earnings surprise in each of the last four reported quarters, with the average being 2.07%. The expected long-term earnings growth rate is pegged at 11.8%, outperforming the industry average of 10.9%.
Price and Consensus: AJG
Aon: Dublin, Ireland-based Aon offers risk management services, insurance and reinsurance brokerage, human resource consulting and outsourcing services worldwide. The divestiture of non-core operations to streamline its business and deepen its focus on more profitable operations generates a higher return on equity. This along with cost-curbing measures bodes well for growth. Aon has an impressive inorganic story. This insurer mainly looks to expand in the 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 2.05% in the trailing four quarters. The Zacks Consensus Estimate for Aon’s 2023 and 2024 earnings indicates a respective 8.6% and 10.3% year-over-year increase. The expected long-term growth rate is pegged at 10.4%
Price and Consensus: AON
Ryan Specialty Group Holdings: Chicago, IL-based Ryan Specialty Group operates as a service provider of specialty products and solutions for insurance brokers, agents, and carriers. This Zacks Rank #3 company is poised to benefit, given its focus on strategic initiatives to increase the scalability of the operating platform, prudent acquisitions and superior performance of the Wholesale Brokerage segment. Given its diverse portfolio of products and solutions, the insurance broker is well poised to capitalize on the growth opportunities in the Excess and Supply market. It carries a VGM Score of B.
The Zacks Consensus Estimate for Ryan Specialty’s 2023 and 2024 EPS indicates a respective 25.2% and 11.8% increase year over year. It has a Growth Score of B. RYAN delivered an earnings surprise in each of the last four reported quarters, with the average being 2.98%.
Price and Consensus: RYAN
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Marsh & McLennan Companies, Inc. (MMC) : Free Stock Analysis Report
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