Five major insurance brokers will find it difficult to grow revenues through 2007, as they continue to be challenged by the soft market while adjusting to life without contingent commissions, Bear Stearns contends.
Indeed, insurance brokers will be faced with a “challenging operating environment” over the next 12-to-18 months, according to a research report issued by analysts David Small and Brandon Young.
The soft market will impact organic revenue growth, coupled with diminished increases in the Southeast from the hard property market, according to the analysts, who also expect intense competition among the brokers for business.
However, restructuring initiatives that began in 2004, following the contingency fee scandal, could help improve income in 2007, they noted. “We project industry-wide insurance broking revenue will be in the low single-digits in 2007,” they said, adding that the situation will remain constant until the market cycle changes.
Of the five major brokers Bear Stearns covers, they said Willis, Arthur J. Gallagher, and Hilb Rogal & Hobbs are expected to achieve “more impressive top-line results” than Marsh or Aon. The three have been hiring new, high-quality producers–primarily from Marsh & McLennan, the parent company of Marsh–and those new hires are expected to reach full productivity going into 2007. This should improve organic growth, they suggested.
Risk manager buying habits are also changing, the analysts pointed out, as they move away from using one broker for their insurance needs and seek to diversify their books–a trend which should help Willis, Gallagher and HRH gain new clients. All three will also remain active acquirers of other firms, the analysts added.
Of the five, Willis was declared the analyst's favorite for strong operating profit per employee, superior operating margins, expense controls, and ability to grow both organically and through acquisitions.
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