The insurance brokerage industry isn’t particularly sexy. But it includes companies with attractive defensive characteristics: slow, but steady growth.
This is what analysts expect for the two biggest players in the industry: Marsh & McLennan (NYSE: MMC) and Aon (NYSE: AON). Marsh has a market capitalization of $91 billion, and Aon has a market cap of $75 billion. Aon serves mostly mid-market companies, while Marsh’s main customers are large multinational businesses.
Given corporations’ steady need for insurance, the insurance brokerage industry might be called a corporate staple, akin to consumer staple stocks.
Marsh and Aon find insurance policies for companies and offer consulting on risk and other areas. Marsh’s Oliver Wyman provides standard management consulting, and Aon offers human resources consulting on subjects such as healthcare and retirement benefits.
For Marsh, its risk & insurance segment accounted for 61% of revenue in the third quarter, and the consulting unit made up the rest. For Aon, the risk and reinsurance division accounted for 63% of revenue, and health and wealth solutions made up the rest. “Wealth” refers to retirement solutions.
The companies’ insurance brokerage revenue comes from commissions that insurers pay based on premium levels. So Aon and Marsh are largely dependent on trends in insurance pricing. Aggregate commercial insurance prices soared 10% in 2020, the first year of the Covid pandemic, but have gradually decelerated since then, climbing just 3.8% in the second quarter.
Revenue growth
Aon and Marsh’s revenue held up in the third quarter, with Aon’s climbing 7% and Marsh gaining 11%. But slower gains are likely coming, analysts say.
Looking at Marsh, in the 10 years prior to the pandemic, organic revenue growth ranged from 3%-5% per year. “And this figure is more indicative of potential long-term growth,” wrote Morningstar analyst Brett Horn. He has a similar view for Aon: 5% annual revenue growth over the next five years, excluding sales from its 2024 acquisition of insurance broker NFP.
This milk-toast outlook for the two companies may explain their stocks’ retreat in 2025 from decent gains of previous years. Aon produced a total return that was almost unchanged over the past year, and Marsh dropped 9.7%. Those results fell far short of the S&P 500’s 17.7% returned.
The two companies have fared batter over longer periods, but still trail the S&P 500 for three, five and 10 years.
That’s not a knock on Aon and Marsh. It just means they’re defensive rather than growth stocks. They have a solid business model, being “uniquely positioned to serve a necessary risk management function,” as Horn puts it.
Strengths of business model
“Brokers can help clients understand their insurance needs,” he said. “They then can search the insurance market more effectively than individual buyers, helping clients to compare insurers’ skills, financial strengths, and reputation.” Marsh and Aon’s global presence increases their knowledge base.
The complexity of their services creates switching costs, because the companies’ clients see value in working with a broker that has experience managing their risk, Horn said. That leads to customer retention, over 90% at Aon.
In light of the inelastic demand for insurance, it’s no wonder that the industry’s brokerages have outperformed the S&P 500 index in five of the last seven recessions, going back to 1980, as Morgan Stanley’s Bob Jian Huang told Barron’s.
Horn calls Marsh and Aon “tollbooth” businesses for their ingrained ability to generate revenue. It looks like they may keep chugging along, though at a slow pace.
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