It’s been a strong week for the S&P 500. But shares in insurance broker Brown & Brown (NYSE:BRO) continue to go down and down.
I’m now well down on my investment and signs of a turnaround are hard to come by. So should I cut my losses and move on to something else?
What’s been going wrong?
There’s been a lot going on in the insurance industry recently. But Brown & Brown has had a tougher time than its rivals. The biggest story has been staff leaving – 275 in a day, to be precise. Importantly, they took their clients with them.
Brown & Brown is taking legal action on grounds of foul play. They’re far from alone in this and the early signs are very promising. Leaving the details of the case aside, it does illustrate something important. In the insurance industry, clients go with their brokers.
It’s not okay for a competitor to steal them. But they can decide to leave of their own free will and that creates a risk for Brown & Brown.
AI threat?
I expect Brown & Brown’s case to result in a settlement and for life to go on. But the point about human relationships is important – and it might be a good thing.
Another reason the stock is down is the emergence of artificial intelligence (AI). AI platforms have started to emerge for personal insurance lines.
This isn’t the kind of thing that Brown & Brown deals in – it focuses on much more specialised commercial lines. But how long until AI figures this out?
That’s been weighing on the share price recently. The risk, however, might not be as significant as the stock market seems to think.
There are a couple of reasons for this. But the most important might be to do with the staff issues that Brown & Brown has been facing recently.
Human relationships
One of the things that Brown & Brown’s recent challenges highlight is the importance of client relationships. But that might help the firm with AI. The more important these relationships are, the harder it is for AI to disrupt the existing operators. And that might be very valuable.
Another advantage Brown & Brown has is scale. This provides value to both parties in an insurance transaction. It gives them the ability to negotiate lower prices with carriers, which helps customers. And it helps carriers with data and visibility across the industry.
It’s never wise to dismiss the threat of AI entirely. But this might be an industry that isn’t so easy to disrupt as it looks.
Looking ahead
The situation is by no means settled. But the stock is trading at an unusually low multiple as a result of the recent challenges.
Despite this, analyst expectations for future earnings are still pretty positive. The current consensus is for $4.51 this year, rising to $5.26 by 2028.
That could obviously change. But it implies a price-to-earnings (P/E) multiple for this year of just under 13, which is historically cheap.
On that basis, I’m interested in buying. I don’t have a strong sense of when I think the stock might turn around, but I’m happy to wait at today’s prices.
