Brokers Earnings To Fall In 04: Analyst

By Mark E. Ruquet

An analysts report predicts that as insurance companies becomemore profitable, premium increases will begin to moderate, leadingto a decline in revenue and income for insurance brokers.

A report by Chicago-based investment banking firm Cochran,Caronia & Co. compared insurance company cash flow for the past60 years with premium changes and the beginning and end ofproperty-casualty market cycles. The firm said its analysis foundthat when carriers accumulated large sums of cash, premium ratesbegan to fall as companies sought to become competitive onceagain.

Under this scenario, the report predicts that premium rate hikesshould decline “from 15 to 20 percent in 2003 to mid-single digitsin 2004.”

This shift, the firm said, will result in diminished performancefor brokers, which could expect to see revenue growth fall 50percent and earnings to drop 30 percent in 2004.

Adam Klauber, managing director of equity research and thereports author, told National Underwriter that the 30 to45 percent revenue increases brokers have experienced during thishard market were driven by increased commissions, in turn driven byrate hikes. He said the loss from premium increases will affect 25percent of their growth in the future. He also said there haventbeen any major mergers or acquisitions among brokers in the pastyear, another major driver of revenue growth.

The absence of big acquisitions this year also indicates themarket has become more competitive, he said. “There are limitedopportunities in the $50 million and up acquisition range,” headded. “As these companies have gotten to $400, $500 million, up to$2 billion in revenue, there are not many acquisitions left thatcan make an incremental difference” to revenue.

But insurance brokers are not in trouble, just seeing adeceleration of growth.

They “are decelerating off of 10-year highs,” Mr. Klauber said.“They are still going to average a reasonable rate of growth. Forthe sector, they will average 13 to 15 percent growth, and for mostfinancial sectors thats pretty solid.”

Reproduced from National Underwriter Edition, July 14, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved. Copyright in this article as anindependent work may be held by the author.