A Wall Street Transcript Interview with John Campbell, Lead Analyst and Research Associate with Stephens Inc. Covering the Bank Technology, Title Insurance and Insurance Brokerage Sectors

Wall Street Transcript

67 WALL STREET, New York - June 12, 2014 - The Wall Street Transcript has just published its Insurance Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Low Profitability and Low Interest Rates - Commercial Line Brokers and Underwriters - Consolidation Trends - Emerging Market Expansion - Analysis Of Personal, Commercial & Reinsurance Subsectors

Companies include: Arthur J Gallagher & Co. (AJG), Willis Group Holdings Ltd. (WSH), Marsh & McLennan Companies, In (MMC), Brown & Brown Inc. (BRO) and many others.

In the following excerpt from the Insurance Report, an expert analyst discusses the outlook for the sector for investors:

TWST: What's going on in the pricing and rate environment at this point, and what are the implications of those pricing trends for the insurance companies in your group?

Mr. Campbell: If you think about the pricing environment over the last several years, it's kind of had fits and starts for the most part. Post 9/11 you saw a very sharp increase in what we defined as a standard hard market. You did see prices start to soften in the mid-2000s, and then you had several years of weak pricing, and that went along with some declines in GDP around the 2008 time frame with the economic meltdown, and so that was kind of a compounded effect for some of the brokers.

But what you've seen lately, and if you fast forward the clock to about late 2011, you start to see the pricing market start to firm up a bit; that was the first time in several years you saw pricing increase which was beneficial. You saw it kind of peak out, mid-single digits, about 4% or 5%, and what you've seen lately over the last several months is the first signs of the market starting to decelerate a bit. And there are a lot of factors going on there, but right now I would call it up 1% or 2%.

The main thing going on there is the capacity in the industry; if you think about overall capacity, you've got a lack of major catastrophic events over the last two years. To add to that you also have a lot of new money coming into the market; you've got the Warren Buffetts of the world, private equity firms, a lot of capital getting into the market with the lack of catastrophic events. So you're kind of overcapitalized at this point. Given reinsurance is typically the predominant driver of the overall insurance pricing cycle, we do think the overcapacity is starting to limit the upward pressure on price, which brings us to this point of a moderate decline in rates. A lot of the industry data sources and a lot of the private channel checks we've run do confirm this deceleration.

But our view here is that it's not going to run like a typical cycle. I don't think that we'll start to see sharply declining rates for the next several years. I think the environment we're in right now is a somewhat sustainable low-single-digit-type environment. I think all three players in the game will benefit in that type of environment - the insurance carriers, the ones who direct the rate, will be happy with a low-single-digit improvement as it will help them somewhat offset the low interest rate environment and the resulting challenges on investment income. The brokers are obviously happy with that type of environment as positive rate comes at a near 100% incremental type margin, and then the consumers, in our view, like the consistency in the market right now, as they don't have to fear waking up one day and seeing their insurance premiums skyrocket 20%.

With all that said, our view is this current rate environment is beneficial to all participants, and there is more discipline in the market right now; we see this as being sustainable over the near to medium term.

TWST: Which stock would you say is your top pick for this year, and what is that you like about it?

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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