The current economic crisis does not bode well for insurance brokerage earnings, and one casualty of the fallout might be Arthur J. Gallagher, which could be a prime acquisition target, one analyst contends.
In an analyst's note, Meyer Shields with Stifel Nicolaus said the reduction in client payrolls due to the economic crisis is posing "a strong headwind to the insurance brokers' domestic revenues."
Massive layoffs across the country impacting virtually all industries directly affect many lines of business–especially workers' compensation, employment practices liability and employee benefits, he noted. Lower earnings can also impact the amount of coverage businesses buy, which by extension cuts into a broker's income.
Among the five major brokerage firms, Mr. Shields said both Brown & Brown and Arthur J. Gallagher face earnings difficulties because their revenues are more dependent on premium volume-based commissions–which are highly volatile in a shrinking economy–rather than on fees for service.
Mr. Shields added that the "impressively lean expense structure" at most brokerages means there is little opportunity to cut costs further to offset falling revenues.
The other three major brokers–Marsh, Aon and Willis–while facing some of the same obstacles, have opportunities for "margin expansion" that will "lead to modest top-line growth and improving margins year-over-year, despite the economic climate," he said.
Marsh, Aon and Willis are all rated as a "buy" for investors, while Brown & Brown is rated as a "sell" and Gallagher is rated as a "hold."
A Gallagher representative declined to comment on what she termed analyst speculation.
Analyst says Gallagher faces earnings difficulties because it is more dependent on commissions at a time when the exposure base is contracting.
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