Mr. Balkind: The insurance brokers have benefited over the last several years from firming pricing in the property and casualty market, which has led to higher revenue growth and expanding pretax margins. The past year has been no different in that regard except that the pressure put on the insurance carriers post-9/11 accelerated the process. So the industry is operating at near peak revenue growth levels currently and generating substantial earnings gains.
TWST: Has this been reflected in the market performance?
Mr. Balkind: For the most part it has, as the brokerage stocks have
outperformed the underwriters and the market as a whole for some time,
including year to date. But we think there is some multiple expansion in
the offing and, when combined with double-digit earnings growth, should
lead to continued outperformance in the near term. From a valuation
standpoint, the brokers probably peaked out about two years ago, when
most investors thought the hard pricing cycle had only just begun. This
is not atypical as brokers tend to be better early cycle stocks based on
historical performance. But with concern of late about the longevity of
the hard market, multiples have compressed to what we think are very
reasonable levels. We think 13%-15% upside potential still exists, on
average.
Tickers included in this excerpt: AJG, AOC, BBT, BRO, FPK, HRH, MMC, USIH, WSH
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