WSJ’s Arends: Take a Look at Insurance Broker Stocks

Monday, 05 Nov 2012 08:50 AM

By Dan Weil

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Stocks of insurance brokers could constitute solid investments in the wake of Superstorm Sandy, says Wall Street Journal columnist Brett Arends.

Your first thought might be that a massive storm would hurt insurers, as they have to pay out big claims.

But a reduction in capital would actually help property and casualty insurers, as they currently have a capital surplus, which has led them to engage in price wars, Arends writes. In addition, large payouts give insurers an excuse to raise premiums.

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Shares of some major insurers, such as Allstate (ALL) and Berkshire Hathaway (BRK-A), trade at attractive valuations, he says.

But insurance brokers represent a less obvious opportunity. “The industry is a global oligopoly, controlled by a handful of major companies such as Aon (AON), Marsh & McLennan (MMC) and Willis Group Holdings (WSH),” Arends writes.

“Their revenues are linked to the value of the contracts they negotiate for clients, so if prices rise, say, 5 percent, they get a 5 percent raise.”

And brokers, which don't bear any of the underwriting burdens or risks, should see strong demand for their risk-management services, as companies rush to make sure they have proper coverage.

So far investors are unconvinced about insurers’ strength, pushing their stocks lower since the storm.

“Several variables are yet to play out, consequently, it remains too early to provide a reliable estimate of the total insured losses,” Claire Souch, vice president for model solutions at RMS, writes in a report obtained by MarketWatch.

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