Following the impact of pandemic induced uncertainties, the insurance brokerage industry is gradually bouncing back. In fact, the industry is well-poised for growth on the back of prudent underwriting, better pricing, constant mergers and acquisitions, cost synergies, technological upgrade plus demand for insurance products and global expansion.
The leading companies have also resorted to consolidation in an effort to expand their presence in the market. The increasing adoption of technology in the industry is commendable. This, in turn, will increase their sales and aid margins. Since the market is somewhat fragmented, the companies are taking up organic and inorganic growth strategies to compete in the market. External market drivers like rise in demand for policies have made the companies cross-sell products. The insurance brokers are also taking up cost-curbing measures to aid their margins. Notably, the rise in number of baby boomers is increasing the demand for medical insurance, life insurance, accidental insurance and other forms of insurance. This insurance brokerage industry is also taking up M&A activities to reshape business rejig and reduce number of players. This is likely to help its traditionally-fragmented structure. Some of the most significant transactions in the industry include Marsh & McLennan Companies, Inc.’s ( MMC Quick Quote MMC - Free Report) 2019 purchase of Jardine Lloyd Thompson Group plc for a consideration of $5.6 billion, which helped expanding its capabilities. Aon Plc ( AON Quick Quote AON - Free Report) is on course to close its Willis Towers Watson buyout in the first half of 2021. This acquisition is the insurance sector's largest deal, combining the world’s second largest and the largest insurance brokers. Other companies, such as Arthur J. Gallagher & Co. ( AJG Quick Quote AJG - Free Report) and Brown & Brown, Inc. ( BRO Quick Quote BRO - Free Report) have also been indulging in a host of activities at a steady pace to enhance their footprint. Insurance brokers have been looking for ways to counter the evolving challenges and boost their portfolios. In this context, these strategic initiatives will be of great help. As per ResearchAndMarkets.com, the global insurance brokers & agents market is expected to increase to $362.54 billion in 2021 from $350.24 in 2020, reflecting a CAGR of 3.5%. This is likely to happen on the back of initiatives taken by the company to combat the effects of the pandemic. The market is projected to reach a whopping $457.31 billion in 2025 per ResearchAndMarkets.com. The overall bullish scenario makes us believe that growth will be consistent in this industry, which should bolster prospects of companies with strong business fundamentals. The Zacks Insurance - Brokerage industry has gained 32% in the past year, underperforming the Zacks S&P 500 composite’s growth of 60.1%. Against this backdrop, we will compare the two leading brokerage insurers Aon and Marsh & McLennan with market capitalizations of $50.6 billion and $59.4 billion, respectively. Both stocks carry a Zacks Rank #3 (Hold), currently. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. Let's analyze certain other parameters to find out which company is better positioned. Price Performance
Shares of Aon and Marsh & McLennan have gained 37.3% and 34.6% in the past year, respectively. This clearly indicates that Aon has an edge over Marsh & McLennan on this front.
For 2021, the Zacks Consensus Estimate for Aon has moved 2.9% north to $10.98 in the past 60 days, while the same for Marsh & McLennan has been revised upward by 1.9% to $5.31.
Earnings Surprise History
A stock’s earnings surprise track helps investors get an idea about its performance in the previous quarters.
Aon has beat estimates thrice in the trailing four quarters with a trailing four-quarter earnings surprise of 2.13%. Marsh & McLennan beat the Zacks Consensus Estimate in each of the trailing four quarters, the average being 9.03%. Thus, Marsh & McLennan clearly has an edge over Aon here. Return on Equity
Return on equity (ROE) 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.
Aon’s ROE of 64.6% compares favorably with Marsh & McLennan’s ROE of 30%. Valuation
Price-to-earnings value is one of the multiples used for valuing insurance brokers. Compared with the brokerage insurance industry’s forward 12-month P/E ratio of 19.5, Aon and Marsh & McLennan has a reading of 19.9 and 21.5, respectively. Aon has a better reading than that of Marsh & McLennan.
Both companies have higher debt-to-equity ratio than the industry average of 105.6X. However, Marsh & McLennan’s leverage ratio of 116.6X betters Aon’s ratio of 215.7X. Therefore, Marsh & McLennan is at an advantage over Aon on this front.
Our comparative analysis shows that Marsh & McLennan is better-placed than Aon with respect to leverage ratio and earnings surprise. Meanwhile, Aon scores higher in terms of price performance, valuation, estimate revision and return on equity. As the scale is slightly tilted towards Aon, the stock discernibly makes a more promising investment proposition.
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