Publicly traded U.S. insurance brokers are expected to produce strong revenue growth for 2020 given near peak level organic growth and favorable U.S. commercial lines insurance pricing trends.
Further, margins remain consistent with investment-grade ratings and are expected to be stable-to-modestly improving in 2020, according to Fitch Ratings' 2020 U.S. Insurance Broker Outlook report.
"Fitch forecasts a stable operating environment for the insurance broker sector. Although profitability levels and organic revenue growth may be at or nearing peak, strong cash flow continues to support servicing of debt obligations,"said Martha Butler, senior director, Fitch Ratings.
Butler said that while financial leverage is expected to decline for several brokers it covers, Fitch has incorporated these lower targets into current ratings.
Fitch's sector outlook for U.S. insurance brokers remains stable supported by strong organic revenue growth and continued favorable profitability. Earnings stability going forward is expected given diverse product and geographic platforms, strong customer retention and technology investments to leverage the industry's value proposition.
Fitch said its rating outlook also remains stable, meaning there is limited potential for rating changes over the next 12-18 months. The sector's balance sheet strength and operating performance support current ratings.
Any potential actions on individual brokers would reflect performance around financial leverage, as measured by debt/EBITDA, the report added.
Fitch's analysis is in line with the thinking by investment analysts at Keefe, Bruyette & Woods in a recent comment on insurance brokerage Brown & Brown.
"Margins for insurance carriers are under pressure as current loss trends worsen and favorable prior year reserve development fades. Carriers respond by raising prices — the benefits of which accrue directly to brokers who collect commission on higher prices but don't pay claims," the KBW analysts said, adding that they expect pricing improvements to continue into 2020, which, combined with an outlook for a steady economy, should translate into improved organic revenue growth.