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Artificial intelligence (AI) has been playing havoc with growth stocks recently. Developments of this scale arguably come around once in a lifetime, but I think it’s created a huge opportunity for me.
The stock market isn’t sure what to make of AI – and I have some sympathy with this. But in the case of one of my favourite companies, I think investors are getting it wrong in a big way.
AI uncertainty
Exactly what AI means for software companies is difficult to work out. So it’s not a big surprise to see share prices all over the place.
Where I didn’t expect to see big movements was in the insurance brokerage industry. On Monday (9 February), though, shares in pretty much all the major US firms fell sharply.
Arthur J Gallagher and Willis Towers Watson were among the firms that saw their share prices drop due to fears of AI disruption. But I think this is a big mistake – and a huge opportunity for me.
Saying that one of my favourite growth stocks is an insurance broker sounds like a cry for help. But I jumped at the chance to add to an investment I’ve been building in my ISA at a discounted price.
What’s the risk?
The concern is AI tools that let consumers go directly from insurers without needing brokers. These are real, but I think the market’s reaction to them is unjustified.
One reason for this is that the major brokers don’t really deal in personal lines. They focus on commercial policies that are more specialised and therefore much harder to disrupt.
The brokers are also able to offer better value to their customers. This is because their scale helps them negotiate better terms from carriers – something an AI start-up or chatbot can’t replicate.
This is why I think the stock market is making a mistake. AI might change the personal insurance industry, but this isn’t what the brokers do and it’s much harder to match them at their own game.
Brown & Brown
The stock I like in this industry is Brown & Brown (NYSE:BRO). As well as the broader protective forces, I think it also has some unique advantages.
Willis Towers Watson has a big consulting division. This part of the firm makes money by charging for billable hours, but if AI speeds up the paperwork, the amount it can charge might go down.
Arthur J Gallagher combines its brokerage services with a claims processing division. Again, if AI agents turn this into a low-value service, that’s bad for the company’s revenues and profits.
Brown & Brown doesn’t really do either of these – it focuses on connecting insurers and customers. But despite my scepticism at how easily this can be disrupted, it still sold off on Monday.
Dislocation
The biggest challenge for Brown & Brown right now isn’t AI. It’s the execution risk of trying to integrate a business it acquired last year into its existing operations.
That’s not something I’m ignoring, by any means. But the risk isn’t any bigger than it was a week ago and the stock is a lot cheaper than it was.
Charlie Munger once said most investors only get around 10 truly great opportunities in their lifetimes. Time will tell, but I think this could be one of mine.
