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Insurance Brokerage Stock Outlook: Bumpy Ride Ahead

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The Zacks Insurance - Brokerage industry comprises companies that primarily offer insurance and reinsurance products and services. Some of these companies are also involved in providing risk management, third-party administration and managed health care services.

Here are the three major themes in the industry:

• Solid customer retention and rising insured exposure amid an improving economy is driving revenue growth for the insurance brokers. For some players, this trend is being supported by continued diversification of operations with the help of mergers and acquisitions. Also, now that the market has started hardening with economic improvement, insurance brokers are capitalizing on their investments and generating better commissions and profits.  
• With business environment becoming more dynamic and complex, the need for insurance brokerage services are on the rise. Moreover, the use of data and analytics have enhanced capabilities of insurance brokers to serve growing need for sophisticated risk management services.
• While investments in technology and analytics should help insurance brokers generate higher revenues in the future, the related expenses have kept operating costs elevated for quite some time. Also, the inorganic growth initiatives have been resulting in higher debt levels for many players. As a result, interest expenses are expected to remain elevated.

Zacks Industry Rank Indicates Cloudy Prospects

The Zacks Insurance - Brokerage industry is housed within the broader Zacks Finance sector. It carries a Zacks Industry Rank #166, which places it at the bottom 35% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which basically the average of the Zacks Rank of all the member stocks, signifies bleak 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 bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. In the past six months, the industry’s earnings estimate for the current year has dipped by 1.1%.

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’s Stock Market Performance

The Insurance Brokerage Industry has lagged the Zacks S&P 500 composite over the past year but outperformed the broader Zacks Finance Sector.

The industry has slipped 1.2% over this period versus the S&P 500 index’s rise of 8.3% and the broader sector’s decline of 5.1%.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month price-to-book (P/B) ratio, which is commonly used for valuing insurance stocks, the industry is currently trading at 4.52X compared with the S&P 500’s 3.85X and the sector’s 2.40X.

Over the last five years, the industry has traded as high as 4.98X, as low as 4.21X and at the median of 4.66X.

Forward 12-Month Price-to-Book (P/B) Ratio


Bottom Line

Strong customer retention and rising insured exposure owing to improving economy will help the industry generate higher revenues. However, rising expenses pose a near-term challenge.

The Zacks Insurance Brokerage space doesn’t currently have any stocks carrying a Zacks Rank #1 (Strong Buy) or 2 (Buy). However, we are presenting three stocks with a Zacks Rank #3 (Hold) that investors may want to hold on to for the time being.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Arthur J. Gallagher & Co. (AJG - Free Report) : For this Rolling Meadows, IL-based company, the Zacks Consensus Estimate for 2018 EPS indicates year-over-year growth of 12.1%. The company has an estimated long-term earnings growth rate of 10.3%. It came up with an average positive surprise of 3.46% in the trailing four quarters.

Price and Consensus: AJG

Aon plc (AON - Free Report) : The Zacks Consensus Estimate for 2018 EPS represents year-over-year growth of 23.6%. This London-based company has an estimated long-term earnings growth rate of 11.6%. It delivered an average earnings surprise of 3.34% in the last four quarters.

Price and Consensus: AON

Willis Towers Watson Public Limited Company (WLTW - Free Report) : For this London-based company, the Zacks Consensus Estimate for 2018 EPS reflects 12.5% year over year improvement. The company has an estimated long-term earnings growth rate of 11.8%. It pulled off an average beat of 2.18% for the preceding four quarters.

Price and Consensus: WLTW


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