U.S. brokers put 2005-06 regulatory investigations “behind them”

U.S. brokers “have largely put the issues from recent regulatory investigations behind them,” according to Fitch Ratings, which assigned a stable outlook to the U.S. insurance broker industry.
In a recent industry outlook, Fitch noted that: “although near-term profitability [in the U.S. industry] may not reach peak levels last seen in 2002 and 2003, Fitch expects the industry’s cash flow to be more than sufficient to support debt-servicing requirements.”
Notably, Fitch believes that restructuring expenses will significantly diminish in 2007 and “does not expect the outcomes of current civil suits against brokers to significantly impair their financial position.”
Fitch listed a number of strengths in the U.S. brokerage industry, including “reasonable financial leverage in most instances, and strong cash-flow characteristics derived from the transaction-oriented and non-capital-intensive nature of the business, which promotes more flexible debt-servicing capability.”
These strengths are offset, the ratings agency added, “by questions of shareholders’ equity quality, primarily due to low and sometimes negative tangible equity levels created by large goodwill and other intangible asset balances.”
In addition, Fitch noted, brokers face risks associated with acquisition strategies, which require meaningful personnel and systems integrations. “Further challenges exist to maintain expenses and operating efficiency at levels that promote adequate profitability in a cyclical environment with continued competitive pressures on pricing and fees.”