The global insurance brokerage industry is doing pretty well these days, all things considered. But a report from Moody’s Investor Service rates the outlook for just two brokers as “positive,” with the other nine earning only a “stable” label. And Moody’s appears less than enthusiastic about the amount of leverage on the books of several privately held brokers.
Moody’s took a peek at the world’s largest brokers to determine if they were returning to health following the trauma many suffered during the recession. The public brokers are deleveraging “gradually,” said Ben Goldberg, Moody's Analyst and co-author of the report. But several smaller private ones “took on substantial new debt to help fund leveraged buyouts in 2012-13," he noted.
The ratings ranged from Baa2 for Aon and Marsh & McLennan to B3 for the leverage addicts. Only Aon and Marsh McLennan scored “positive” outlooks. Median rating for the public brokers (the third was Willis Group) was Baa2, while the 10 private brokers had a somewhat mediocre B3 median rating.
"We expect the private brokers to moderately improve their credit metrics over the next 12-18 months through a combination of organic growth and small-to-midsized acquisitions," said Bruce Ballentine, Moody's VP-Senior Credit Officer and co-author of the report.
Looking at the credit strengths and weakness of the sector, here’s what Moody’s highlighted.
- Steady demand for brokerage products and services as clients face increasingly complex risks
- Limited capital expenditures, averaging about 20 percent of EBITDA on Moody’s adjusted basis
- Lack of underwriting or investment risk
- Steady cash flows supported by largely variable cost structure
- Slow pace of economic growth, particularly in the United States and Europe
- Potential liabilities arising from errors and omissions — a risk inherent in professional services
- High financial leverage and low fixed charge coverage among private brokers
- Integration risk from acquisitions as sector continues to consolidate
Moody’s added: “The public brokers are viewed more favorably than similarly rated financial and non-financial firms by the credit markets. Credit default swap levels for the two largest brokers have been consistently tighter than composite levels for Baa-rated financial and non-financial firms in recent years.”