P/C Insurance Brokers Profitable Despite Tough Economy, Soft Pricing

It takes more than a bad economy and declining prices to weaken property/casualty insurance brokers.

Moody’s Investors Service says in its new Industry Scorecard report that the insurance brokerage sector remains financially solid despite the weak U.S. economy and soft commercial market.

With organic growth a challenge, major brokers will be eyeing mergers and acquisitions for growth, according to Moody’s.

“While the economic downturn and lower pricing resulted in marginal or even negative organic growth for some insurance brokers in 2009, overall the industry was able to maintain profitability,” says Benjamin Goldberg, co-author of the report.

A valuable service offering, a high proportion of variable costs, and lack of underwriting or investment risk helped the industry remain profitable, though revenues declined from 2008 levels.

“Brokers responded to market challenges by cutting costs, exiting non-core operations, and in most cases slowing the pace of acquisitions,” Goldberg says. Consequently, operating margins were fairly stable, and fixed-charge coverage and financial leverage metrics improved modestly.

Since February 2010, top brokers have again been permitted to accept contingent commissions from insurance carriers. This is credit positive for these brokers, providing the opportunity to reap incremental revenues and facilitating the acquisition of smaller brokers that already accept contingents.

“Mergers and acquisitions will remain a strategic focus for major insurance brokers given the fragmented nature of the industry, particularly in the U.S.,” says Bruce Ballentine, co-author of the report.

With gradual improvement in the economy, insurers may see some organic revenue growth, as well as higher profit margins and better financial flexibility, according to Moody’s.

Moody’s Scorecard splits insurance brokers into two distinct groups, the publicly traded companies and smaller, privately held firms. It provides analysis and metrics for both in three main areas: business profile, profitability, and financial flexibility.

The report is titled “Insurance Brokerage — Industry Scorecard.”

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