U.S. Markets closed

Insurance Brokerage Stock Outlook: Few Bumps in the Offing

Trina Mukherjee

The Zacks Insurance - Brokerage industry comprises companies that primarily offer insurance and reinsurance products and services. Here the insurance brokers act on behalf of their clients and offer advice keeping in mind the clients’ interests. Some of these companies are also involved in providing risk management, third-party administration and managed health care services.

Here are the industry’s three major themes:

  • Given an improving economy, strong customer retention and increase in insured exposure have been fueling revenue growth for the insurance brokers. Moreover, income is generated through commissions earned on policies sold. This in turn, leads to higher revenues as policy prices rise and volumes increase. Further, pertaining to some players, this trend is being supported by a steady diversification of operations through mergers and acquisitions. Also, with the market getting stronger on buoyant economic conditions, insurance brokers are capitalizing on their investments and generating better commissions and profits.
     
  • As the business environment is becoming more dynamic and complex, the need for insurance brokerage services is growing convincingly. Additionally, utilization of data and analytics has strengthened the insurance brokers’ capabilities to cater to the increasing need for sophisticated risk management services.
     
  • While investments in technology and analytics should help insurance brokers generate solid revenues in the future, the expenses associated with such investments have kept operating costs elevated for a considerable period of time. Also, the inorganic growth initiatives have been inducing higher debt levels for many players. As a result, interest expenses are expected to remain escalated.

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 #188, which places it at the bottom 27% 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 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 a 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. Over the past year, the industry’s earnings estimate for the current year has dipped 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 Outperforms S&P 500 and Sector

The Insurance Brokerage Industry has outperformed the Zacks S&P 500 Composite and the broader Zacks Finance Sector over the past year.

The industry has gained 9.4% versus the S&P 500’s slip of 0.6% and the broader sector’s decrease of 8.5 %.

One-Year Price Performance



Industry’s Current Valuation

On the basis of the trailing 12-month price-to-book (P/B) ratio, which is commonly used for valuing insurance stocks, the industry is currently trading at 4.88X compared with the S&P 500’s 3.87X and the sector’s 2.49X.

Over the last five years, the industry has traded as high as 5.11X, as low as 2.92X and at the median of 3.92X as the chart below shows.

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

 



Bottom Line

Strong customer retention and rising insured exposure owing to thriving economy will help the industry yield stronger revenues. However, increasing 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 four stocks with a Zacks Rank #3 (Hold) that investors may want to hold on to at the moment.

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

Arthur J. Gallagher & Co. (AJG): For this Rolling Meadows, IL-based company, the Zacks Consensus Estimate for 2019 EPS indicates year-over-year growth of 11.3%. The company has an estimated long-term earnings growth rate of 10.2%. It came up with average positive surprise of 1.47% in the trailing four quarters.

Price and Consensus: AJG



Aon plc (AON): The Zacks Consensus Estimate for 2019 EPS represents a year-over-year rise of 12.8%. This London-based company has an estimated long-term earnings growth rate of 11.8%. It delivered average earnings surprise of 4.82% in the last four quarters.

Price and Consensus: AON



Willis Towers Watson Public Limited Company (WLTW): For this London-based company, the Zacks Consensus Estimate for 2019 EPS reflects a 9.9% year-over-year improvement. The company has an estimated long-term earnings growth rate of 12.4%. It pulled off average beat of 5.57% for the preceding four quarters.

Price and Consensus: WLTW



Brown & Brown, Inc. (BRO): For this Daytona Beach, FL-based company, the Zacks Consensus Estimate for 2019 EPS represents a 8.1% year-over-year increase. The company has an estimated long-term earnings growth rate of 10%. It pulled off average beat of 4.54% for the preceding four quarters.

Price and Consensus: BRO

 

Today's Best Stocks from Zacks

Would you like to see the updated picks from our best market-beating strategies? From 2017 through 2018, while the S&P 500 gained +15.8%, five of our screens returned +38.0%, +61.3%, +61.6%, +68.1%, and +98.3%.

This outperformance has not just been a recent phenomenon. From 2000 – 2018, while the S&P averaged +4.8% per year, our top strategies averaged up to +56.2% per year.

See their latest picks free >>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Willis Towers Watson Public Limited Company (WLTW) : Free Stock Analysis Report
 
Brown & Brown, Inc. (BRO) : Free Stock Analysis Report
 
Aon plc (AON) : Free Stock Analysis Report
 
Arthur J. Gallagher & Co. (AJG) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research