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ABIA Insurance Weekly
November 16, 2004
Eliot Spitzer’s investigation of
commercial brokerage has left retail consumers questioning the integrity of the
industry. In a reactive move, many of the leading brokers have abandoned
contingency commissions.
According to WFG Capital Advisor’s latest study,
this retaliatory measure will lead to a gaping hole in their
bottom line earnings and will cause many brokers to reevaluate
their business model and take drastic measures to appease
shareholders’ demands.
The study of the industry’s top seven brokerage
firms reveals that the impact on “tax affected” net income
represents over 25% of their composite earnings.
According to Steven Wevodau, Managing Principal,
“This astounding statistic underscores the vital nature of
contingents and the presumed impact to the industry’s leading
segment. At a time when product rate declines are severely
punishing most firms’ organic growth, the relinquishment of this
significant revenue stream presents an ominous outlook to the
economic welfare of leading brokers.”
“Many of these public companies must contend with
shareholder demands and market capitalization issues that press
the need for continued growth and enhancement of earnings per
share. If this is not likely to occur, severe deterioration of
market capitalization is at risk. This will have a significant
impact on the viability of many firms as shareholder confidence
wanes and access to capital erodes,” adds Wevodau.
“Our firm belief is that this move on the part of
several industry leaders will require that more aggressive
growth strategies via acquisitions will be deployed in the
upcoming quarters. Another key area is that many of the top
brokers may have overestimated their value proposition to the
client and may end up struggling to retain clients due to lost
consumer confidence.” Wevodau
said.
Robert Lieblein, Managing Principal adds, “There
are industry wide implications to contend with. The only option
available to high performing firms are to attempt to supplement
lost income through an effective acquisition strategy. There is
a lot of speculation on rate trends and if January reinsurance
contracts are where we suspect that they will be, major broker
will struggle to fill sizeable revenue and earnings gaps.”
Lieblien added “Larger brokers are not the only
ones that will be affected. Contingents flow right to the bottom
line of any firm, and elimination of such a significant
component would erode many small to midsized firms’ ability to
continue to meet market demands and competition. Any time you
cut 25% out of the profit margin of any business, you greatly
impair its ability to reinvest in growth and infrastructure,
while sustaining risk-based sustainability to weather the
cyclical nature of the brokerage market.”
For additional information visit www.wfgca.com or
contact Paul Feldman, Director of Communications,
pfeldman@wfgca.com. |
