Mr. Shields: We cover Arthur J. Gallagher (AJG), Aon (AOC), Brown & Brown (BRO), Hilb Rogal & Hobbs (HRH), Marsh & McLennan (MMC) and Willis (WSH).
TWST: As you talk to the companies, how are they feeling about the world?
Mr. Shields: There is a clear recognition that we are in a soft market and that
that's likely to get worse before it gets better. Having said that - and
recognizing that on a net basis, rates going down is not good news for insurance
brokers - it's less bad news than the simplistic assumption. Typically when
rates go down for insurance, commissions go down, and that's a major component
to revenue, so that's bad news. But, when the price of insurance goes down,
insurance consumers buy more of it. So for the brokers, their pay is based on
the volumes, and that helps.
We also expect to see an uptick in mergers and acquisitions, which is good for
several of the brokers. Some of them are too large to benefit materially from
continued acquisition, but some of the smaller brokers - Gallagher, Brown &
Brown and HRH - are acquiring brokers, and in the softening market, we see more
targets available.
The last point I would make is that the brokers are assuming an increasingly
important role in the soft market. A soft market is defined as a period when
insurance companies are reducing rates because they want to grow. When insurance
companies want to grow, another lever they can pull is the focus on the point of
distribution, which is the brokers. So on a net basis, it's still probably more
bad news than good news, but it is not just bad news.
Tickers included in this excerpt: AJG, AOC, BRO, HRH, MMC, WSH
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