Moody’s Bullish on Insurance Brokers

A new report from New York-based Moody’s Investor Service gives mostly high marks to insurance brokers.

The report, “Insurance Brokerage, Industry Scorecard,” says brokers have fared better than other insurance sectors. “The insurance brokerage sector remains financially solid despite a weak economy and a soft commercial property/casualty (P&C) market,” the report states. “While the economic downturn and lower pricing resulted in marginal or even negative organic growth for some insurance brokers in 2009, the industry was able to maintain profitability given a valuable service offering, a high proportion of variable costs, and lack of underwriting or investment risk.”

Moody’s credits the sector’s overall financial health to industry-wide cost-cutting measures, such as the exiting non-core businesses and a generally slowing pace of acquisitions. The report also notes a difference between the three, large publicly traded brokers Aon Corp., Marsh and McLennan Cos. Inc. and Willis Group Holdings plc and their privately held competitors. The publicly traded firms are, on average, less leveraged than the private brokers, many of whom participated in leverage buyouts (LBOs) or recapitalization transactions (recaps) during 2006-2007.

“In general, the private firms have fallen short of the revenue and profit projections they made at the time of the LBOs/recaps, but have reduced their costs and limited their investments to achieve fairly stable operating margins despite aggressive financial flexibility metrics,” the report states.

Nonetheless, Moody’s predicts more consolidation in the future as the economy recovers.

“We also expect that mergers and acquisitions will remain a strategic focus for virtually all major insurance brokers given the fragmented nature of the industry, particularly in the U.S.,” the report states. “While the gradually improving economic environment may result in modest organic revenue growth, slightly higher profit margins, and better financial flexibility metrics, we expect to see stability in ratings for the remainder of 2010.”