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Insurance brokers may see improved financials in 2016

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U.S. insurance brokers' revenues and earnings are likely to modestly improve in 2016 compared with levels reported during the first nine months of this year, Fitch Ratings Inc. said Thursday in a report.

However, while revenue growth is expected to remain positive over the next 12 to 18 months, it is “more likely to decelerate in part due to negative insurance pricing trends going into 2016,” the New York-based credit rating agency said in its report, “2016 Outlook: U.S. Insurance Broker Industry.”

The report says reinsurance “remains the greatest source of headwinds” for brokers with a large market presence, including Aon P.L.C., Marsh & McLennan Cos. Inc. and Willis Group Holdings P.L.C.

“The ability of brokers to demonstrate value-added services and products such as benefits consulting and data and analytics capabilities will remain critical for success in order to compete against increasingly sophisticated primary insurers and larger capital bases, especially given recent primary market consolidation,” says the report.

The report also says the health insurance exchange business has been below expectations because of “the complex nature of the recent health industry changes and both employers and employees' behavior.”

The report says Fitch expects the higher levels of merger and acquisition activity seen in 2014 and thus far in 2015 to continue. “Fitch expects brokers will continue to supplement organic revenue growth through selective acquisitions,” says the report. “Activity and pricing aggressiveness may be tempered if interest rates increase, but acquisitions remain a reasonable source of growth.”

The report adds, however, “A large merger between the top three global brokers remains unlikely given the resulting overlap of business and potential financing and integration costs required.”