The Long and Short
Buy opportunity for insurance brokers
This material is a Marketing Communication and does not constitute Independent Investment Research.
Insurance brokers recently have been drawn into the fray over AI disruption after the introduction of a new app, causing spreads to widen rapidly over the past several weeks. While AI innovation carries undeniable uncertainty, the response in risk markets for insurance brokers appears overdone and creates a rare buy opportunity in a highly stable segment of the broader insurance space.
The opportunity that AI presents to generate new operating efficiencies and improve profitability among the larger competitors appears to outweigh the potential loss of revenue in more basic transactional elements of the industry. On February 9, OpenAI approved the first AI app from an insurance provider on ChatGPT, which investors quickly considered a major step toward obsolescence of more traditional channels within the industry. But this innovation appears little more than an extension of ongoing retail level automation to generate quotes for individual and commercial insurance buyers, at least initially. Complex multiline policies that need to be negotiated across multiple carriers will likely continue to rely on brokers for the foreseeable future, just with more AI analytical assistance, at potentially lower costs to the operators. Meanwhile, higher value consulting and advisory services should continue to thrive as well.
While an overweight to insurance brokers was a relative win in 2025, at the end of last year the trade had looked increasingly crowded, stretching valuations and suggesting more of a marketweight allocation. With the recent backup in spreads, investors now appear well compensated for risk and should pursue an overweight position in the segment. Insurance brokerage credits have remained a favored niche within the broader insurance sector given their relative stability to traditional property and casualty names. As traditional P&C underwriters struggled in recent years to bear catastrophe costs, those market conditions have helped the profitability of global insurance brokers with upward pressure on pricing. Furthermore, ongoing interest rate volatility and uncertainty regarding the path of the Fed still creates investment portfolio risk that more directly impacts insurance underwriters. The biggest credit risk for the industry constituents continues to be the prospect of debt-funded M&A growth.
Month-to-date, investable debt within the investment grade insurance broker industry widened by an average of 13 bp across the credit curve (Exhibit 1 and Exhibit 2). Those issuers include Marsh (MRSH: A3/A-/A-), AON (AON: Baa2/A-/BBB+), Willis Towers Watson (WTW: Baa2/BBB+/BBB+), Arthur J Gallagher (AJG: Baa2/BBB/BBB+), and Brown & Brown (BRO: Baa3/BBB-/BBB). Spreads backed up as much as 20 bp to 25 bp in the long-end of the curve for the lower-rated competitors and anywhere from 10 bp to 20 bp for the largest issuers (MRSH, AON). In the early phase of the selloff, MRSH priced a new 10-year bond on February 11 at a spread of 78 bp versus initial price talk of 105 bp. This was the broker’s first debt launch since 2024, and generally performed well, currently indicated at a spread of around 75 bp.
Exhibit 1. Investment grade insurance brokers credit curve (current)
Source: Santander US Capital Markets LLC, Bloomberg/TRACE YAS price indications only
Exhibit 2. Investment grade insurance brokers credit curve (January month-end)
Source: Santander US Capital Markets LLC, Bloomberg/TRACE YAS price indications only
The bigger risks posed by AI to the insurance brokerage industry appear to lie with smaller, low-margin, transactional operators. Those are the same players that are already at risk of being edged out or assimilated by the larger investment grade players listed above. Firms like MRSH are already investing heavily in AI risk modeling and predictive analytics designed to enhance productivity and eventually improve margin performance. High volume, simple, personal home and auto policies represent an increasingly smaller and lower-margin piece of the business to the large operators. The most profitable lines of business for insurance brokers include employee benefits and health consulting, which generate tremendous recurring annual revenues and require bespoke, highly-specialized levels of service that appear far more likely to be enhanced by AI than replaced by it. Additionally, the development of complex, individualized policies that require tremendous amounts of expertise do not seem at any immediate risk as well.
A benefit of industrywide consolidation over the past several years, as well as the efforts by the largest constituents to target the most value-added business lines, are the extraordinarily healthy profit margins sustained by the investment grade brokers year after year. Averaging over 30% EBITDA margins over the past several years across the Big Five issuers, profitability is arguably roughly double what is being generated by the major traditional P&C underwriters such as ALL, CB, PGR and so on. BRO has been a standout in this regard, as its growth strategy over the past few years has kept margins a priority over simply adding scale to match the larger players.
Exhibit 3. Insurance brokers LTM EBITDA margins (%)
Source: Bloomberg LP, Company Filings
Helping backstop the credit quality of the insurance broker subgroup has always been very stable and well-funded liquidity profiles. While M&A remains a critical element of the industry, and issuers often take on additional leverage for growth opportunities, the management teams have remained committed to taking leverage down in relative short order and always maintaining adequate liquidity sources relative to their liquidity needs. BRO is a little stretched compared to the other players as the company remains in deleveraging mode following its recent acquisition of RSC/Accession for $9.825 billion, closed in August of last year funded in part with a $4.2 billion debt launch in the US dollar corporate bond market.
Exhibit 4. Insurance Brokers – Near-term Liquidity Profiles
Source: Bloomberg LP, Company Filings
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