Fitch Expects Modest Gains for U.S. Insurance Brokers in 2016

January 4, 2016

Revenues and earnings for public U.S. insurance brokers are likely to modestly improve in 2016 relative to levels reported through nine months of 2015, according to Fitch Ratings’ 2016 U.S. Insurance Broker Outlook report.

The ratings agency said near-term operating performance and balance sheet strength will remain supportive of a stable credit ratings outlook for the brokers in its ratings universe. Fitch said it sees limited potential for rating changes over the next 12 to 18 months, despite anticipating modest improvement in some credit fundamentals in 2016.

However, according to Fitch, Willis Group Holdings PLC is an exception. Willis is on Rating Watch Positive due to the proposed merger with Towers Watson & Co. Fitch noted that the merger faced closing uncertainty tied to gaining Towers Watson shareholder approval. However, on Dec. 11 Towers Watson & Co. won approval from its shareholders for the  $8.9 billion merger, overcoming opposition from proxy advisers. Willis shareholders also supported the combination, according to a joint statement from the companies.

The sector outlook is stable as debt servicing capabilities are anticipated to remain steady. A soft reinsurance market with flat or declining premium rate changes in primary commercial insurance segments will pressure brokers’ 2016 organic growth and profit margins. However, global brokers’ revenues from diverse product and geographic platforms, including healthcare and benefits consulting, should help offset these headwinds. Strong retention and insured exposure growth from a slowly improving economic environment will also promote revenue expansion.

Fitch said its analysis of financial data for a group of publicly traded brokers reveals that on average profit margins were relatively flat in 2015 with two of the five peers reporting reduced margins in part from one-time items. Financial leverage increased for several organizations including the three largest brokers while interest coverage remains favorable and supportive of current rating levels.

Source: Fitch

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