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Should You Pay a Premium for Insurance Brokers?

By Sam Stovall The September 11 terrorist attacks caused investors to embrace or avoid a host of industries, some of which were easy to understand while others were not. While it may seem counter-intuitive in light of the attacks, one industry that could see increased investor interest is Insurance Brokers. That group, along with Distillers & Vintners, is new to the roster of industries with top S&P Relative Strength rankings of "5" -- meaning they are in the top 10% of all industry groups based on trailing six-month price performance. (See the table below for the top-ranked industries as of Oct. 5, 2001.)

I asked Catherine Seifert, who heads up S&P's Financial Sector group and covers the insurance industry, about the prospects for these stocks. She says that the S&P Insurance Brokers Index, after rising 13% in 2000 amid investors' hopes that these "early cycle" shares would benefit from stronger commercial lines insurance premium rates, fell along with the broader market in the wake of the World Trade Center disaster.

Although Seifert anticipates that the group will remain soft over the coming weeks, she says S&P's investment outlook for this industry remains fairly positive in the intermediate and longer term, assuming the worldwide economy is able to sidestep a severe recession.

The insurance brokerage business is dominated by two global giants -- Aon Corp. (AOC) and Marsh & McLennan (MMC) -- which have become even more powerful amid an industry-wide consolidation trend. But Seifert points out that neither firm is immune to the competitive property-casualty premium pricing caused by an oversupply of underwriting capacity in the insurance marketplace. But she says the firming of commercial line insurance rates that was already underway will rapidly accelerate in the face of the World Trade Center terrorist attack. Although both firms, with offices in the World Trade Center, suffered immense personnel losses in this disaster, Seifert believes they are well-positioned to benefit from the higher commission revenues and increased demand for risk management services that will likely occur in the face of this tragedy.

As a means of partially reducing their dependence on the competitive commercial lines insurance market, many brokers have expanded their focus to include benefits and management consulting, loss-control surveys and analysis, and self-insurance consulting services. Over the last several years, brokers' dependence on fee-based income has expanded. Marsh & McLennan, the leading insurance broker, derives a stream of fee income from its ownership of Putnam Investments, one of the largest asset managers in the U.S.

Finally, Seifert notes that the the consolidation trend underway in the insurance brokerage community will also likely continue, largely because the brokerage business is competitive, labor-intensive, and dependent on strict cost controls to ensure profit margins. Much of the recent M&A activity has centered on large, publicly traded entities. In the future, she says, smaller, second-tier, brokers will likely align with one another in the hope of achieving greater economies of scale.




Consumer Electronics

Harman International (HAR)

Not Ranked

Distillers & Vintners

Anheuser-Busch (BUD)

Environmental Svcs.

Waste Management (WMI)


Barrick Gold (ABX)

Health Care Distributors & Services

AmerisourceBergen (ABC)

Health Care Facilities


Household Products

Procter & Gamble (PG)

Insurance Brokers

Marsh & McLennan (MMC)

Metal & Glass Containers

Pactiv Corp.(PTV)

Trading Cos. & Distributors

Fastenal Inc. (FAST)

Water Utilities

Amer. Water Works (AWK)

Stovall is senior sector strategist for Standard & Poor's

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