Insurance brokers are not expected to make any great strides in their earnings in 2013 as competition and continued world economic challenges will leave little room for improvement, says Fitch Ratings.
In a report released yesterday titled “2013 Outlook: U.S. Insurance Broker Industry,” Fitch says revenues and earnings for U.S. insurance brokers “are anticipated to remain relatively stable in 2013 with levels reported in the first nine months of 2012.”
Fitch says the current operating performance and earnings strength supports its current ratings.
Revenues have not changed substantially for the brokers this year, despite premium increases that insurers have been getting, the rating service notes.
“This pricing trend appears sustainable into 2013, which should promote continued moderate growth going forward,” says Fitch.
Merger and acquisition growth for large and midsize brokers “remains constrained” because of “a shrinking supply” of acquisition targets of a size that “would significantly enhance acquirers’ revenue scale.”
Turning to profit improvement, Fitch, examining Marsh & McLennan Companies, Aon, Willis, Arthur J. Gallagher, and Brown & Brown, says that rate increases the industry has been experiencing have translated into modest improvements for the brokers.
Marsh & McLennan, Aon and Gallagher have consulting businesses that compliment earnings, says Fitch. Because the consulting businesses are affected by the general economic environment, improved economies next year should aid in strengthening revenue growth.
“Fitch expects that consolidated profit margins could improve incrementally in 2013 and beyond,” says the rating service.
Regarding mergers and acquisitions, for the first six months of this year agency and brokerage “deals declined roughly 11 percent compared to the same period last year.” However, the pace of acquisition this year will likely exceed the great recession years of 2009 and 2010.
Merger and acquisition activity is not robust due the combination of challenges that still exist in the general economy, the firming insurance market that is helping producer’s organic growth numbers. Fitch also notes that some brokers “are still in the process of integrating prior acquisitions.”
Overall, operating earnings for brokers increased by 15 percent in Fitch’s Insurance Broker Index of the five major brokerage firms over the first nine months of this year. The increase was contributed primarily to Willis and Marsh & McLennan.
Aon was negatively affected by modest increase in expenses, while Willis expenses improved over last year.
Also helping the brokers, besides rate increases was their “cautious return to contingent commissions.”
Aon stands to see significant earnings increase in the future with its new healthcare exchange and completion of its restructuring program. The broker expects cumulative annual savings of $355 million to be fully realized by the end of 2013, says Fitch.