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.
Although players in the industry faced disruption due to the COVID-19 led pandemic, it is slowly getting back on track by working remotely to provide services. The insurance brokers are well-poised for growth on the back of global expansion, cross selling of products, tightening underwriting standards and controlling expenses.
The insurance brokerage industry is continuously evolving with cross-industry M&A activity that is reshaping business profiles and consolidating the space, which has traditionally remained fragmented. One of the factors driving mergers and acquisitions is the need of the companies to become specialized in their businesses and expand their geographic footprint. 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.
Recently, Brown & Brown, Inc.’s (BRO - Free Report) subsidiary Brown & Brown of Massachusetts, Inc. acquired considerably all Amity Insurance Agency’s assets. A host of acquisitions took place in the insurance brokerage space of late, given the significant capital available.
The leading players are also embracing technological changes to stay competitive in the market. Companies are focused on using technology and innovation including AI, robotics and blockchain to simplify and improve client experience, increase efficiencies, alter business models and bring about other disruptive changes in the industries wherein the existing players operate.
The overall bullish scenario makes us believe that growth will be consistent in this industry, which in turn, should boost prospects of the companies with strong business fundamentals. Further, the Zacks Industry Rank within the top 30% (76 of 251) suggests that these companies are better placed.
Against this backdrop, let’s look at the two leading insurer brokerage companies, namely Arthur J. Gallagher Co. (AJG - Free Report) and Marsh & McLennan Companies, Inc.’s (MMC - Free Report) with their respective market capitalization of $19.8 billion and $57.5 billion. Each stock currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
In the past year, Arthur J. Gallagher and Marsh & McLennan have gained 16.8% and 17.8%, respectively. The industry has rallied 8.4% in the same time frame compared with the S&P 500 composite’s rise of 14.6%.
Let's analyze certain other parameters to find out which company is on a healthier ground.
Earnings Surprise History
A stock’s earnings surprise track helps investors get an idea about its performance in the previous quarters.
Arthur J. Gallagher’s bottom line managed to beat estimates in all the trailing four quarters, the average being 11.1%. Notably, Marsh & McLennan’s earnings surpassed the consensus mark in all the trailing four quarters, the average being 8.3%.
While both companies boast a positive earnings surprise record, Arthur J. Gallagher has an edge over Marsh & McLennan here.
Return on Equity
Return on equity is a profitability measure, which accounts for profits generated on shareholders’ equity. Hence, higher ROE reflects the company’s efficiency in using its shareholders’ funds and is preferred by all equity investors.
Marsh & McLennan’s ROE of 31.8% compares favorably with Arthur J. Gallagher’s ROE of 16%.
Price-to-book value is one of the multiples used for valuing insurance brokers. Compared with the industry’s trailing 12 month’s P/B ratio of 5.98, Arthur J. Gallagher and Marsh & McLennan have a reading of 3.5 and 6.85 each.
It is clear that here Arthur J. Gallagher’s valuation is better than Marsh & McLennan’s.
Earnings growth along with stock price gains is often indicative of a company’s strong prospects.
The Zacks Consensus Estimate for Arthur J. Gallagher’s 2020 earnings implies an 18.1% rise from the year-ago reported figure while that of Marsh & McLennan suggests an increase of 3.2% from the prior-year reported number.
Here Arthur J. Gallagher outpaces Marsh & McLennan.
Arthur J. Gallagher’s leverage ratio of 43.8X betters Marsh & McLennan’s ratio of 58.8X. Therefore, Arthur J. Gallagher is at an advantage over Marsh & McLennan on this front.
Our comparative analysis shows that Arthur J. Gallagher is better-positioned than Marsh & McLennan with respect to earnings surprise, valuation, earnings guidance and leverage. Meanwhile, Marsh & McLennan scores higher in terms of return on equity. As the scale is slightly tilted toward Arthur J. Gallagher, the stock discernibly makes a more promising investment proposition.
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