Goldman Sachs Gets Constructive On Insurance Brokers

Improving economic growth and dissipating insurance pricing headwinds prompted Goldman Sachs to take a more constructive view on the insurance brokers, as it upgraded its coverage view on the sector to Attractive.

The Analyst

Goldman analyst Yaron Kinar upgraded Aon plc Class A Ordinary Shares (UK) AON from Neutral to Buy and increased his price target from $143 to $162.

The rating on Willis Towers Watson PLC WLTW moved from Sell to Neutral, with the price target increased from $88 to $90.

The Thesis

Improving fundamentals, while helping insurance brokers generate organic growth in a generally scalable business, should also lead to greater cash flow generation, Kinar said in a note. This will drive multiple expansion, making some insurance broker valuations rich.

Even a flat property & casualty rate environment is favorable for insurance brokers, as it eliminates a pricing headwind, the analyst said. As opposed to commercial insurers, insurance brokers don't take liability risk, obviating the need to have pricing remain above loss cost trends, Kinar added.

On Willis Towers Watson, Goldman expects growth momentum to emerge due to the improving fundamentals. With the company lowering its revenue synergies, Kinar said it has allayed one of its concerns that organic revenue growth targets were too aggressive.

The company also faces less challenging prior-year comps, relative to peers, which should help outperformance.

"Moreover, we note that consensus estimate revisions appear to have inflected and have been increasing, offering further support to WLTW shares," Kinar said.

The Price Action

Shares of Aon and Willis Towers Watson are up 23 percent and 26 percent, respectively, over the past year.

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