Since Sept. 11, insurance brokers have parted ways with insurance companies: Brokers stocks have soared, while insurers have plummeted. The reason: Brokers don't face underwriting risks--and won't be exposed to large claims. In fact, brokers stand to benefit: A surge is expected in demand for coverage. So the analysts have raised their earnings estimates on brokers by 30% to 50%, notes Steven Kroll, managing director at investment bank Monness, Crespi, Hardt. He says insurance rates are expected to double and insurance coverage to swell by 30% in the next few years. The brokers get an estimated 3% to 5% commission on policies they place. Thus, they gain not only from a jump in rates but also from the rise in coverage.
So Kroll is bullish on Marsh & McLennan (MMC ), which owns the world's top insurance broker; Hilb, Rogal & Hamilton (HRH ), the seventh-largest U.S. broker; Arthur J. Gallagher (AJG ), with 200 offices in the U.S. and eight foreign nations; Brown & Brown (BRO ), a diversified broker selling primarily property and casualty; and Willis Group Holdings (WSH ), serving the construction, aerospace, and energy industries.
Analyst Joanne Smith of Salomon Smith Barney (C ) has raised her rating on Marsh & McLennan from "buy" to "strong buy." Says Smith: "We are comfortable that MMC could produce better-than-expected earnings and revenue growth due to a probable hardening in primary and reinsurance property and casualty premium rates."
By Gene G. Marcial