Citigroup Lowers Broker Earnings Estimates

Citigroup analysts lowered its earnings estimates for insurance brokers to reflect “persistent” weakness in the pricing for property-casualty insurance products, but two brokers with global reach will continue to outperform their peers.

“Specifically, we view Aon and Willis as the only two brokers that should be able to grow organic revenues, margins and earnings per share over the next three years,” the report said.

The two brokers, the report notes, will perform better because their exposure to Asia will continue to provide growth despite the weak pricing environment and they have a larger percentage of recurring fee-based income revenue compared to the commission-based revenues regional brokers are more dependent on.

The analysts note that global brokers are increasing their middle-market presence, “creating intense competition where the regional players contend,” and they have a greater ability to cut costs.

The report by analysts Keith Walsh and Michael Tarkan bases its conclusions on the fact that the p-c market prices have softened over the last few years, resulting in flat to modest premium growth.

They cite the Council of Insurance Agents and Brokers' third quarter survey that found average p-c premium rates decreased 13.3 percent–the 14th straight quarter of declines–with the past four quarters showing an average decline of 12 percent.

The analysts say their conclusion that global brokers will do better is based on an estimate that there is a 93 percent correlation between net written premiums and insurance broker revenues.

“Lower prices in a soft market generally lead to more modest organic revenues for brokers,” the report said. “However, this is partially offset, as customers can 'afford' more insurance, and, therefore, usually elect to take out additional coverage.

“So,” they conclude, “the impact of a soft market is necessarily as it seems–likewise, a hard market may not necessarily be as good as it appears.”

The analysts add that it is their view that global brokers “are best positioned” to weather pricing pressure as they derive a higher percent of recurring fee-based revenues from their domestic large corporate accounts.”

For example, at Marsh & McLennan 50 percent of total brokerage revenues are driven by commissions, compared with 60 percent at Aon and approximately two-thirds for Willis. This compares to approximately 85 percent of revenues being generated by commissions by regional brokers, they said.