Insurance Brokers: Good investments for the age of risk & uncertainty

In a world where the global economic outlook can be flipped around with a single tweet, it has become harder than ever to predict the future. However, there is one thing we can say with confidence: the level of risk and uncertainty has gone to a whole new level... and is unlikely to subside any time soon.

The big question is: Which types of companies are best positioned to navigate and even benefit from this sort of environment? Our answer: Insurance Brokers.

Pella has always seen Insurance Brokers as attractive stocks to own in uncertain times and they have served us well during previous bouts of market volatility.

Reason #1: Resilient financial performance

Their financial performance has proved to be resilient to economic shocks and slowdowns. For example, their organic growth remained positive throughout the COVID period.

Reason #2: Demand rises as risk and uncertainty rises

The services that the Insurance Brokers provide become more valuable as their customers encounter new forms of risk.

Their primary service (arranging insurance coverage) is specifically designed to help customers identify, measure, and mitigate the risks facing their own businesses.

• Therefore, heightened risk (and the emergence of new forms of risk) helps to boost client demand.

• Higher risk also leads to higher insurance prices. For example: climate change = steadily rising property insurance premiums; ageing population = steadily rising life/health insurance premiums.

Unlike the insurance companies themselves, the brokers benefit from these rising premiums without having to make the payouts on the associated claims.

• This dynamic also provides built-in protection against inflation (higher inflation = higher claim costs = higher premiums = higher brokerage revenue).

Reason #3: Consulting also benefits from changing/challenging conditions

The Consulting side of the business (which includes Health, Wealth and Employee Benefits advice) also tends to be relatively resilient to a slowing economy. It is not quite as resilient as the Broking side, because some of the services provided by the consulting businesses are discretionary, whereas the annual purchase of insurance is entirely non-discretionary.

Pella’s portfolio includes two Insurance Broker stocks:

• Arthur J Gallagher (AJG) – a leading global insurance broker and the world’s largest third-party claims manager.

• Marsh & McLennan (MMC) – owner of Marsh, the world’s largest insurance broker, as well as Mercer, a leading global consultancy firm.

The charts below show the resilience of both companies’ business models during periods of severe economic stress.