Today's Viewpoint: A MarshBerry Publication

Broker Results Round-up

Highlights from public broker earnings releases and analyst calls

Last week, five publicly traded insurance brokers reported results for the first calendar quarter of 2020: Arthur J. Gallagher (AJG), Aon plc. (AON), Brown & Brown, Inc. (BRO), Marsh & McLennan Company (MMC) and Willis Towers Watson (WLTW). Below is a recap of some of the common themes and take-aways from these calls.

  • Little impact seen in the first quarter from COVID-19. Most brokers indicated they did not see anything noticeable in the business until early to mid-March. BRO reduced its revenue collected in February as a result of the declines that became known in March related to employment levels. Under specific accounting practices, the revenue booked in February was using certain estimates of headcount, payrolls, etc. that are now expected to materially shrink. AJG mentioned this is going to have a big impact in Q2. Lines of business noted that are most negatively affected by COVID-19: Workers Compensation and Employee Benefits.
  • Uncertainty in the outlook. Two of the public brokers (WLTW; AON) rescinded their previously provided financial guidance, and the others either gave a wide range of possible outcomes or held back from forecasting much of anything at all. Many of the brokers continued to highlight the fact that the vast majority of their underlying revenue is not discretionary, but expect revenue impacts from reduction in exposure base, business closures and possible changes to coverage in order to reduce premiums. Several companies also noted they are seeing higher retention rates but lower levels of new business. Rates were also suggested by a few of the brokers as continuing to increase overall. The net impact of these offsetting factors is nearly impossible to quantify right now.
  • Expense reductions and access to capital highlighted. Across the board, brokers are reducing discretionary spending on T&E and non-employee related costs. In addition, some (AON; AJG) have reduced compensation for a broad percentage of their employees. Many brokers have committed capital in the form of revolvers and lines of credit that have yet to be drawn upon. Both BRO and MMC mentioned they are highly liquid. Liquidity concerns have been more important for the public brokers as future cash flows may be delayed due to moratoriums on premium payments. Share buybacks and other “elective” spending were also put on pause in many cases to preserve liquidity.
  • Merger & acquisition appetite still strong but activity has slowed. None of the public brokers suggested they are no longer interested in acquiring businesses or that their acquisition strategies have significantly changed, but the current economic climate has slowed the process for many sellers and buyers as they each assess the impacts on potential transactions.

Overall, the public brokers reported results in 1Q20 that showed little impact from COVID-19. The consensus suggests both 2Q and 3Q will be significantly impacted and described as recessionary, with MMC predicting the recessionary environment could last throughout 2020. The companies highlighted their relative resiliency and insulation from significant economic swings given the nature of their business. The duration and curve of the recovery remains the most significant factor in their future financial performance.

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This earnings summary has been prepared by Marsh, Berry & Co., Inc. and is not intended to provide investment recommendations on any company. It is not a research report, as such term is defined by applicable laws and regulations, and it does not contain sufficient information upon which to make an investment decision. It is not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any securities, financial instruments or to participate in any particular trading strategy. These materials are based solely on information contained in publicly available documents and Marsh, Berry & Co., Inc. has not independently attempted to investigate or to verify such information.

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