The Investment column: Brokers may be bargain buy

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Britain's insurance broking sector has been a dire performer in recent years. Since 1993, it has underperformed the market by almost 60 per cent due to falling commissions and intense competition. Willis Corroon and Sedgwick, the only two brokers of any size left in the UK, have born the brunt of the industry turmoil. The sector has increasingly suffered from a growing trend among multinational corporations to cut out the middle man.

Many companies have now grown to such a size that using an insurance company to cover a business risk is becoming increasingly impractical. They are instead setting up their own, captive insurance companies to cover day-to-day risks.

Bigger risks such as earthquakes or floods are still put out to reinsurers. But more often than not, companies are bypassing brokers to deal with the handful of reinsurers who take on these kind of risks.

This logic has taken a particularly strong hold in the US, where brokers such as Willis Corroon derive half their income. The trend has led to downward pressure on premium rates, reducing commission income for brokers. That has inevitably lead to the consolidation of the industry. One by one, the brokers have been eliminated. Now there are just four: the two British firms and their giant US rivals, Marsh & MacLennan and Aon.

That consolidation seems to have paused for now. John Reeve, Willis Corroon's executive chairman, has stubbornly resisted pressure to merge with Sedgwick, and hostile takeovers are difficult in what is seen as a people business.

Against this turbulent background yesterday's full year results from Willis pleased the market, with profits coming in comfortably ahead of expectations at pounds 95.5m (pounds 91.6m).

Willis has chosen a different course to Sedgwick, which has looked to win more fees rather than commission-based work, as evidenced by its acquisition of Noble Lowndes. Instead it has been able to increase commissions by using a system whereby the insurer agrees to pay higher commission in return for receiving a greater volume of profitable business.

Willis has also managed to boost US business with companies over there looking to spread business amongst the brokers still left in the business.

Analysts have pencilled in earnings of pounds 105m for the current year, putting the shares on a prospective p/e ratio of 9. The broking market will remain tough. That said the shares are now sitting at such a large discount to the stock market they are beginning to look attractive. If trading gets much worse it can only heighten takeover speculation.