Our prior report discussed the fallout attributed to the release of a handful of Claude Cowork plugins. The impact was an indiscriminate slide in the price of certain insurance stocks, such as brokers. Our take at the time was that the sell off was indiscriminate as if all brokers have equal downside to the threat AI may pose to the brokerage and consulting businesses of insurance brokers. What our report shows this week is that the subsequent recovery in stock price has varied from large companies such as Aon to smaller companies that include Arthur Gallagher.
As we highlighted in our prior report, the fear is that Cowork, an agentic AI assistant, will handle everyday workplace tasks that could obviate, or at least reduce demand for, the risk placement services and the consulting services that insurance brokers provide. This is a fair point: revenue from brokerage and consulting businesses is 100% of total revenue for certain insurance brokers impacted by the slide. What has changed is the initial, indiscriminate sell-off sharpened its focus and, rightfully so, continued to take aim at smaller companies with simpler placement solutions that might be automated vs larger companies that offer complex risk solutions.
We also pointed out that other companies, such as P&C companies, may actually realize efficiency gains from AI advancements. Unlike smaller brokers that have nearly 100% revenue exposed to downside risk, P&C companies could see the benefits of automation, albeit with improvement limited to a segment of total expenses.
Previously released data shown in the figure below had pointed to the beginning of an improvement in the jobs environment, yet recent headlines included layoffs and hiring freezes.
February 7 initial jobless claims and unemployment: decreased to 277,000, which was slightly above expectations and remains at historically low levels.
February 11 nonfarm payrolls: added 130,000 jobs, which was above expectations, and unemployment remained at 4.3%.
The nonfarm payrolls economic data released Friday morning (March 6), after publication of our written report on the FactSet Workstation, showed a deterioration in both the unemployment rate, which ticked up from 4.3% to 4.4%, and job creation, which flipped from a previously reported 103,000 jobs created to today's report of 92,000 jobs lost.
This obviously derails last month’s positive data, which had suggested a possible beginning of an upward trend. Even after the uptick in unemployment, the 4.4% rate does not spark concern for the economy or writers of group insurance. The flip in jobs creation is the bigger concern and emerges amidst headlines of corporate layoffs. At best, this is a signal that growth of group business is at a standstill. At worst, further heightened deterioration in job growth would lead to a decline in future group premiums.
The table below compares valuation metrics of two insurance brokers mentioned earlier that both suffered a decline in share price following the release of the Claude add-ins: the larger company Aon and the smaller company Arthur Gallagher. From a valuation perspective it is interesting that the companies trade at similar multiples of forward earnings (red box), yet Aon—not surprisingly—trades at a higher price to book. In the aftermath of Claude, it appears the earnings of the larger company offering more complex risk solutions should also trade at a premium due to its relatively more secure forward earnings.
There has been a considerable difference in the recovery of share prices since the sell off. Shown below are the share prices of Arthur Gallagher and Aon. Both stocks experienced a similar, initial drop in share price. Arthur Gallagher, the smaller company, experienced an ongoing sell-off for another several sessions. Most recently, Aon has nearly recovered losses, while Arthur Gallagher remains below its pre-selloff price.
Combined, the data points support a welcome improvement in the demand for labor. The red box in the figure below highlights the recent, multi-month uptick in unemployment that sparked concern for insurance companies with exposure to group business, such as Hartford, Met, and Pru. The most recent data, while certainly not a trend, provides welcome respite from months of tepid labor data. The improved jobs data sets the stage for what could be a positive 1Q environment for Hartford, Met, Pru.
A sustained uptick in the jobs data would help reverse the tailwinds we addressed in a prior note ("Contrary to Positive Estimates, Jobs Data Points to Headwinds") that would impact companies with exposure to group premiums, such as HIG, MET and PRU. The following table links macro data, such as the unemployment rate, to insurance company earnings.
Our Macro Tracker table lists key economic data relevant to insurance company earnings. The right-hand column ties macro trends to the potential impact on company earnings.
Insurance insight reports can be accessed from the Workstation using the document search function with this search string: Insurance Tracker: Event of the Week.
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