The Zacks Insurance - Brokerage industry comprises companies that primarily offer insurance and reinsurance products and services. Insurance brokers act on behalf of their clients and offer advice keeping in mind clients' interests against brokerage fees. Some of these companies are also involved in providing risk management, third-party administration, and managed health care services.
Technavio analysts forecast the global insurance brokerage market to grow by $13.84 billion or at a CAGR of more than 4% during 2020-2024, according to their latest market research report.
Here are the industry's three major themes:
- The operational results of the industry players are affected directly by clients’ level of business activity, which in turn, depends on the extent of economic activity in the industries and markets that they serve. The disruption caused by the COVID-19 pandemic rendered severe volatility to the stock market and resulted in recessionary fears across the globe. Like the second quarter, the third quarter of 2020 is also expected to see a significant impact of the coronavirus-induced restrictions. Though working remotely to provide uninterrupted service should aid performance of the brokerage insurers, recovery to pre-pandemic levels will take time. Also, the players are continually expanding globally, cross selling products, increasing rates, tightening underwriting standards, and controlling expenses. Growth in aging population is driving demand for retirement benefit products while rising population of baby boomers and millennials is boosting demand for medical insurance, life insurance, accidental insurance and other forms of insurance.
- The insurance brokerage industry is witnessing fast-paced consolidation. The industry has been traditionally fragmented with a number of small players. One of the factors driving mergers and acquisitions is the need of the companies to become specialized in their businesses. Some other factors driving M&A are the interest shown by private equity firms in this sector, growing competition, and a lack of organic growth.
- To maintain competitiveness in the industry, players are embracing technological change. The threat comes from new entrants, including technology companies like Insurtech, start-ups, and others. These players are focused on using technology and innovation, including artificial intelligence, robotics and blockchain, to simplify and improve client experience, increase efficiencies, alter business models and bring about other disruptive changes in industries in which the existing players operate. While investments in technology help increase business efficiency, expenses associated with such investments increase operating costs.
Zacks Industry Rank Indicates Encouraging Prospects
The Zacks Insurance - Brokerage industry is housed within the broader Zacks Finance sector. It carries a Zacks Industry Rank #24, which places it in the top 9% of more than 250 Zacks industries.
The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, signifies solid near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 9% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are upbeat about this group’s earnings growth potential. Estimates have moved up 2.5% since June end.
Before we present a few insurance broker stocks that you may want to consider for your portfolio, let's take a look at the industry's recent stock-market performance and valuation picture.
Industry Outperforms Sector but Underperforms S&P
The Insurance Brokerage Industry has performed better than the Zacks Finance Sector over the past year but underperformed the Zacks S&P 500 composite.
The industry has gained 9.8% compared with the S&P 500's increase of 16.2%. The broader sector hohas declined 8.8% in the said time frame.
One-Year Price Performance
Industry's Current Valuation
On the basis of the trailing 12-month price-to-book (P/B), which is commonly used for valuing insurance stocks, the industry is currently trading at 6.5X compared with the S&P 500's 4.5X and the sector's 2.39X.
Over the last five years, the industry has traded as high as 2.91X, as low as 1.72X and at the median of 2.53X.
Trailing 12-Month Price-to-Book (P/B) Ratio
Trailing 12-Month Price-to-Book (P/B) Ratio
Technology continues to be of utmost priority for industry players, as it will enable them to better use data and digital capabilities. This will be possible largely through solid partnerships with appropriate tech firms.
On the M&A front, we expect competition to remain stiff until interest rates increase materially. The industry is likely to see increased interest from private equity players for mergers and acquisitions. Strategic players will buy businesses that make sense financially and fit culturally.
Also, a hard insurance market with rates firming will provide a growth platform for insurance brokerages.
One stock in the space currently sports a Zacks Rank #1 (Strong Buy).You can see the complete list of today’s Zacks #1 Rank stocks here.
eHealth, Inc. (EHTH - Free Report) is the leading online source of health insurance for individuals, families and small businesses. It delivered an average earnings surprise of 82.02% in the trailing four quarters. The Zacks Consensus Estimate for current-year earnings has been revised 11.1% upward over the past 30 days. The expected long-term earnings growth rate is pegged at 21%, better than the industry average of 12.2%.
Price and Consensus: EHTH
Here we are presenting three Zacks Rank #2 (Buy) stocks that appear to be solid investment propositions too.
Daytona Beach, FL based Brown & Brown (BRO - Free Report) markets and sells insurance products and services in the United States, England, Canada, Bermuda, and the Cayman Islands It delivered an earnings surprise in each of the last three reported quarters. The Zacks Consensus Estimate for 2020 EPS indicates a 9.3% increase year over year. The consensus estimate has moved up about 7% in the past seven days.
Price and Consensus: BRO
The Zacks Consensus Estimate for Arthur J. Gallagher’s (AJG - Free Report) 2020 EPS indicates a 13.4% increase year over year. This Rolling Meadows, IL-provider insurance brokerage, consulting, and third party claims settlement and administration services in the United States, Australia, Bermuda, Canada, the Caribbean, New Zealand, and the United Kingdom delivered an earnings surprise in the last four reported quarters with the average being 11.10%. The expected long-term earnings growth rate is pegged at 9.5%. The consensus estimate has moved up 3.2% in the last seven days.
Price and Consensus: AJG
New York based Marsh & McLennan Companies (MMC - Free Report) provides advice and solutions to clients in the areas of risk, strategy, and people worldwide. It delivered a four-quarter average surprise of 8.34%. The Zacks Consensus Estimate for 2020 indicates 3.2% year-over-year increase. It has moved up 4.1% in the last seven days. The expected long-term earnings growth rate is pegged at 6%.
Price and Consensus: MMC