Commercial rates strong enough to deliver broker growth in slowdown

Insurance brokers need not suffer on advent of an economic slowdown in the US given the likelihood that commercial pricing can hold steadier than the overall economy in any pending downturn, analysts at a key equity brokerage are telling their investor clients. 

Wells Fargo analysts were triggered by the mid-December risk-off move on markets from which brokers have failed to recover, despite what Wells Fargo considers their strong defensive credentials. 

“Given the still strong commercial lines pricing environment, we expect that brokers can weather the storm of slowing GDP and still report mid-single-digit organic growth,” Wells Fargo analysts told investor clients. 

GDP growth appears set to suffer a “meaningful decline” to some 3% by end-year, but commercial price growth in the mid to high single-digit range is sufficient “to sustain organic growth north of 5% for the group on average,” Wells Fargo forecasts. 

Word from AJ Gallagher at a mid-December investor day that organic growth in 2023 could co in around 9% and conditions might hold enough to deliver 7-9% organic growth in 2024 added a recent dose of optimism, analysts noted. 

A study of broker performance during the past three major recessions - Covid-19, the financial crisis and 2000-22 - showed brokers able to fend off recession or soft markets, just not both at once.  

Broker organic growth is “clearly influenced” by both GDP and pricing trends “but appears to be able to withstand soft market conditions or economic contractions provided they do not occur concurrently.”  

For the time being, commercial lines look sufficiently firm that “if GDP growth slows, insurance brokers would still a benefit from pricing on organic revenue.”

Since mid-December, the big-5 insurance brokers are down 4.1% on average, underperforming the S&P 500 which was up 0.7% over the same period. 

Brokerage income need not be the only weak point during an economic downturn, Wells Fargo acknowledges.

Fiduciary investment income would slow almost by definition, but Wells Fargo believes the group “can absorb the headwind and still show margin improvement,” in part by slowing reinvestment from such income sources.  

The Wells Fargo bottom line for investors:  the recent low in share prices and the failure to rebound with the broader market make “a good entry point,” all the better ahead of Q4 earnings announcements. 

Gallagher remains the top pick among brokers for Wells Fargo, which cites the broker’s “consistent performance” in organic growth and margins. WTW is high in the rankings, evidenced by Wells Fargo's  recent upgrade to Overweight.

Aon is the outlier. “We remain cautious on AON given its weaker organic growth plus noise associated with the NFP deal,” Wells Fargo analysts wrote. 

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