Fitch Ratings Looks at '08 Results, '09 Forecast

Fitch Ratings has released its annual analysis of the U.S. insurance brokerage industry.

Fitch's Rating Outlook for the insurance broker industry is Stable. A Stable Outlook implies that Fitch would not expect ratings to change in the near term for the brokers in Fitch's ratings universe.

Through the first nine months of 2008, financial results indicate that the industry's performance in 2008 will fail to match prior year results, largely due to the softening pricing environment suppressing commission growth while some brokers continue to incur costs associated with streamlining their operating platforms and integrating acquisitions.

Fitch nevertheless believes that the insurance brokerage industry and specifically the larger broker firms that are in Fitch's rating universe continue to possess qualities that are consistent with investment grade ratings.

The five publicly traded brokers tracked by Fitch have seen consolidated operating income, which excludes realized gains and losses and other significant non-recurring items, fall by an average of 11%, with four of these five companies experiencing a year-over-year decline. This decline is considerably less severe than the profit decline reported by property/casualty insurers, which have shifted to an underwriting loss for the year and have also experienced significant losses on invested assets.

Looking ahead to 2009, Fitch expects overall industry profitability to be flat to modestly lower, as the economic recession and competitive insurance rate environment will continue to challenge brokers to grow organically or improve operating margins. Willis Group Holdings, Ltd. (Willis) and Aon Corp. (Aon) should incur costs associated with recent acquisitions that could make it difficult for these companies to improve reported profit margins in 2009. As importantly, the difficult operating environment will challenge these companies to achieve the intended benefits of these transactions.

Moreover, the global economic downturn could pressure the performance of the consulting businesses at Marsh & McLennan Companies and Aon, which are more tied to the economic cycle than the core insurance brokerage businesses.

Fitch's review and outlook, 'Review and Outlook 2008-2009: Insurance Broker Industry' is available at www.fitchratings.com.