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Stock Strategist Industry Reports

Insurance Brokers Navigating Difficult Markets

Insurance broker valuations look attractive amid persistent market headwinds.

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Insurance brokers have been buffeted by a variety of headwinds in recent years. Soft insurance pricing, a bad recession, record-low short-term interest rates, and an upheaval in regulatory treatment of commission revenue came together to negatively impact the brokers. The arrival and persistence of these factors has tested the patience of investors. But the difficult environment has also produced attractive valuations in an industry we view as fundamentally attractive.

Brokerage margins and revenue growth have been depressed compared to their longer-term performances, and we think this group can produce better growth as well as higher profitability in a more normalized environment. We like the economic 'moatiness' of the brokers as a general rule; this is a business with low capital requirements playing an important intermediary role that produces value and good margins by aggregating buying power. Brokers can also help insurers economize on marketing costs and manage adverse selection and moral hazard. They are a relatively safe financial services sector investment, as well.

Bill Bergman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.