A colleague recently said to me: “Closing the economy was the easy part; opening it will be much harder.” This colleague raised questions such as how soon will people return to their offices? How jam packed will the local pubs be? Can I put off getting my hair colored for another month?
At MarshBerry, we keep pondering what clues should we be on the lookout for. This week, several of the publicly traded insurance brokers will report first quarter earnings, beginning tomorrow with Brown & Brown, Inc. (NYSE: BRO). We are not as interested in their historical results as we are with what these entities will say with regard to prospective statements.
- Are the public brokers still going to continue making acquisitions?
- Will strategic considerations for Merger & Acquisition (“M&A”) overtake opportunistic ones?
- Will company size, product line, carrier markets or geographic diversification become more or less important when considering which companies to acquire?
- Will these public brokers value top performers differently from average ones (e.g. will the spreads in valuations start to widen after several years of narrowing)?
- Will the number of LOIs (letters of intent) serve as a leading indicator of continued M&A appetite?
Insights into the level of M&A activity in the coming months should provide us with a better sense of the swiftness of the economic turnaround.
We are also watching for announcements of layoffs and salary reductions. How pervasive and/or deep have cuts been or will be at the largest brokers? For instance, Aon Plc (AON: NYSE) announced last week in its April 24, 2020, Securities & Exchange Commission Form 8-K filing that it is implementing 50% salary reductions for board members and executives:
“Due to the COVID-19 pandemic and the resulting economic disruption, the Board of Directors of Aon plc determined to temporarily reduce the annual base salaries of the Company’s named executive officers (“NEOs”) and the cash compensation of each of the Company’s non-executive directors.
“Each of Aon’s NEOs, Gregory Case, Chief Executive Officer, Christa Davies, Chief Financial Officer, Eric Andersen, President, and John Bruno, Chief Operating Officer, as well as Tony Goland, the Company’s Chief Innovation Officer, have agreed to a temporary 50% reduction in their base salary from May 1, 2020 through December 31, 2020, or until such other date as decided by the Aon.
“In addition, each of Aon’s non-executive directors has agreed to a temporary 50% reduction in their cash compensation from May 1, 2020 through December 31, 2020, or until such other date as decided by Aon.”
Is Aon’s move a one-off action, or have and will other public brokers follow suit? And what about large private backed brokers? Will they follow suit? The answer to these questions should provide further insight into how the economy will reopen.
Finally, what should we expect to see emanate from state insurance departments? We have already seen the California Department of Insurance (“DOI”) issue “guidance” requesting insurance companies refund commercial and personal auto premiums for the months of March, April and May to insureds as a result of an overall decrease in miles driven. California is also “requesting” workers’ compensation writers to cover COVID-19 claims if a worker gets infected, regardless of the origin of the virus (e.g. from a family member or a co-worker).
- Will other state DOIs follow California’s lead in auto premium rebates and workers’ compensation coverage for COVID-19?
- Will carriers penalize insurance brokers in the form of lower commissions or a claw back of commissions already issued as a result of returning auto premiums?
- If carriers resort to litigation, will it prove to be a public relations nightmare that reflects poorly on independent insurance brokers that represent these clients?
- Will insurance brokers need to up their customer service even more to respond to negative consumer backlashes?
Answers to these and other questions should provide us a near-term glimpse into how we will recommend insurance brokers operate as the economy resumes operations. Hang on to your hats; it could be a bumpy ride from here.
As we keep our eye firmly focused on the industry and actions within it, we are eager to know what you are experiencing. Today we are launching the MarshBerry Pulse. Take a quick 3-minute survey to help us gauge the industry’s response and outlook as the country moves towards “open for business” from the anticipated loosening of stay-at-home orders.
If you have questions about Today’s ViewPoint, or would like to learn more about our interpretation of actions and reactions during the pandemic, please email or call Gerard Vecchio, Senior Vice President at 212.972.4886.
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