Brokers Earnings To Fall In 04: Analyst

Brokers Earnings To Fall In 04: Analyst

By Mark E. Ruquet

An analysts report predicts that as insurance companies become more profitable, premium increases will begin to moderate, leading to a decline in revenue and income for insurance brokers.

A report by Chicago-based investment banking firm Cochran, Caronia & Co. compared insurance company cash flow for the past 60 years with premium changes and the beginning and end of property-casualty market cycles. The firm said its analysis found that when carriers accumulated large sums of cash, premium rates began to fall as companies sought to become competitive once again.

Under this scenario, the report predicts that premium rate hikes should decline “from 15 to 20 percent in 2003 to mid-single digits in 2004.”

This shift, the firm said, will result in diminished performance for brokers, which could expect to see revenue growth fall 50 percent and earnings to drop 30 percent in 2004.

Adam Klauber, managing director of equity research and the reports author, told National Underwriter that the 30 to 45 percent revenue increases brokers have experienced during this hard market were driven by increased commissions, in turn driven by rate hikes. He said the loss from premium increases will affect 25 percent of their growth in the future. He also said there havent been any major mergers or acquisitions among brokers in the past year, another major driver of revenue growth.

The absence of big acquisitions this year also indicates the market has become more competitive, he said. “There are limited opportunities in the $50 million and up acquisition range,” he added. “As these companies have gotten to $400, $500 million, up to $2 billion in revenue, there are not many acquisitions left that can make an incremental difference” to revenue.

But insurance brokers are not in trouble, just seeing a deceleration of growth.

They “are decelerating off of 10-year highs,” Mr. Klauber said. “They are still going to average a reasonable rate of growth. For the sector, they will average 13 to 15 percent growth, and for most financial sectors thats pretty solid.”

Reproduced from National Underwriter Edition, July 14, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.