Better Broker Earnings Projected For 2009, Particularly For Big Firms

Larger insurance brokers are expected to see improvements in earnings as the market cycle begins to turn, but middle-market intermediaries may still suffer from the effects of the economic downturn, according to a financial analyst's report.

Overall results are expected to be mixed as “pricing remains flattish,” with premium pricing ranging from a decline of 2-to-3 percent to up 5 percent–excluding short-tail reinsurance lines, said Keefe, Bruyette & Woods in its “Property and Casualty 1Q09 Earnings Preview: Relative Normalcy.”

“We anticipate top-line growth to remain weak outside of the Bermudians, who benefitted from a good Jan. 1 renewal season. More importantly, the global recession will pressure unit growth,” the report said.

For brokers, the report said the analysts expect “a decent quarter,” with “modest low- to mid-single-digit revenue growth…”

The large brokers–Aon, Marsh and Willis–are expected to do better than their middle-market counterparts, according to the KB&W analysis, because they are better positioned to benefit from price increases and marketplace dislocation.

Modest revenue growth is projected in the low- to mid-single digits, with the large brokers benefiting from reinsurance price improvements. Organic growth should be flat to slightly up for the large brokers, while middle-market outfits should see modest growth, KB&W said.

In other areas:

o Merger and acquisition activity, noted the report, should offset the weak organic growth numbers–especially for the middle-market brokers.

o Overall, insurance rates are expected to increase by the second half of this year, with reinsurance rates already seeing increases, according to KB&W.

o Regional agency and specialty insurers are expected to see increases in overall gross premiums on a year-over-year basis, the report noted, although the current economic crisis should reduce exposures and have an impact on the overall insurance business.

o Weather-related losses are not seen as having much impact on regional and specialty insurers.

o Non-catastrophe-related claims are expected to be flat, but professional liability losses will probably increase, “driven by the significant decline in the value of real estate, stocks and other investments,” the report said.

o Workers' compensation severity is increasing in California and Florida, which is translating into the need for rate increases, the analysts added.

o Favorable loss-reserve development is expected to “slow down considerably” for p-c companies, and the boost to earnings from those loss-reserve developments will not be “as significant going forward as it has been in the past” eight-to-12 quarters, according to KB&W.