Continued increase in insurance pricing in specific products or geographies, and also a continued slow rebound in selling units should add up to more insurance premiums, and therefore, should add up to higher revenue for brokers as they get more commissions on those premiums, says Brett Huff, a Research Analyst at Stephens Inc.
“I think right now an important point is just how the brokerages are paid, and general brokerages are paid in two ways, either by fee or by commissions,” he said. “The reason that’s important right now is because we think rates are getting better, albeit slowly.”
Huff favors Brown & Brown Inc. (BRO) in the insurance brokerage segment because it is a stock that has a lot of exposure to smaller businesses, and as a result, has lots of opportunities for organic growth as those businesses begin to recover. He also believes there could be further meaningful upside for Brown & Brown due to the company transitioning from an environment where rates and exposure units have been against it more than its peers.
“And I think both of those trends are abating and they are going to start seeing some tailwinds rather than headwinds. And we think that bodes well for Brown & Brown, moving from sort of the eight-ish times forward EBITDA valuation to nine or even higher,” Huff said.
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