Insurance News

Soft rates, struggling U.S. economy drag on brokers’ earnings

Posted on: August 27, 2010

Soft insurance rates and the weak U.S. economy’s reduction of exposure levels weighed on the largest publicly traded brokers’ earnings during the first half of the year, analysts say.

“Broadly speaking, things are not great,” said Meyer Shields, an analyst with Stifel, Nicolaus & Co. Inc. in Baltimore. “In general, the head winds that the brokers faced last year are getting lighter, (but) they are not going away. The economy is still not helping and soft rates are not helping.”

Softening rates appeared a bigger drag on the brokers’ earnings during the second quarter than the first quarter, said Cliff Gallant, an analyst at Keefe, Bruyette & Woods Inc. in New York. “So the trend is not good,” he said.

But the economy’s negative effect on exposure levels and revenues appeared to have eased, observers say.

“I wouldn’t go as far as to say things are picking up, but certainly there was stabilization,” Mr. Gallant said. “That’s positive.”

Despite the challenges, some of the brokers posted a profit for the first half of 2010 (see chart, page 16).

London-based Willis Holdings P.L.C. said its net income for the first six months of the year rose to $293 million, up 4.6% compared with the same period in 2009. Its first-half revenues increased 3.5% to $1.77 billion compared with a year earlier. For the second quarter, Willis posted net income of $89 million, up 2.2% from 2009’s second quarter.

In a conference call with analysts, Willis Chairman and CEO Joe Plumeri said he was pleased with the results given the soft rates and economic conditions.

“The environment though remains pretty tough,” Mr. Plumeri said. “In the U.S., we have not seen evidence of sustained recovery yet. Economies in a number of other countries where we do business also remain under considerable pressure. And the rate environment is still…very soft and unlikely to change significantly through the remainder of 2010 in the absence of major loss activity.”

New York-based Marsh & McLennan Cos. Inc. also reported gains in revenue and net income for the period. Net income rose to $484 million, up from a $17 million loss during the same period in 2009. Its revenue increased about 6% to $5.2 billion for the first half of this year.

MMC said its retail brokerage revenue grew to $2.4 billion, up 9% from the same period a year earlier, but its revenue growth rose only 1% on an underlying basis, which excludes the impact of acquisitions, dispositions and fluctuating foreign currency rates.

For the second quarter of 2010, MMC revenue grew roughly 6% to $2.6 billion while net income climbed to $236 million from a $193 million loss for the same period of 2009.

“Our performance is impressive given the continued challenges presented by soft market conditions in the global property/casualty commercial insurance marketplace, which shows no signs of abating, and the overall weak economic environment in the developed markets,” MMC President and CEO Brian Duperreault told analysts during a conference call.

Meanwhile, Chicago-based Aon Corp. said its net income fell 23% to $331 million for the first six months of 2010 compared with the year earlier period. First-half revenue increased 2% to $3.8 billion. For the second quarter, Aon reported profits of $153 million, up from $149 million. Revenue rose 1% to nearly $1.9 billion.

Daytona Beach, Fla.-based Brown & Brown Inc. said its first-half net income declined 3.8% to $85.3 million while its total revenue decreased 2.7% to $495.5 million. Net income for the second quarter this year climbed 1.3% to $41.2 million, but revenue for the period slumped about 1% to $244 million compared with the same period last year.

Arthur J. Gallagher & Co. posted net six-month earnings of $73.2 million, up 4.2% from the same period a year earlier. The Itasca, Ill.-based broker also saw its revenues for the first half of this year rise 10.2% to $942 million. Second quarter net income was $44 million, barely up from $43.8 million a year earlier.

Organic growth, an important marker of broker vitality, continues to be a struggle for the industry, Mr. Shields said.

“For the most part, (brokers’ organic growth) is a very small positive number or a slightly smaller negative number,” Mr. Shields said. “That again is a function of rate decreases and economic challenges.”

Organic growth rates varied.

For the second quarter, Gallagher reported a 4% decrease in organic fees and commissions, dropping to $555 million in 2010 compared with 2009.

In contrast, Willis said its organic commissions and fees increased 4% globally during the second quarter, which Mr. Plumeri called “an outstanding achievement,” given the environment.

To counter the challenging operating environment, the brokers have acquired other companies and cut their expenses, analysts said.

Aon, for example, said its 1% growth in total revenue for the second quarter was helped by acquisitions, primarily its December purchase of Jericho, N.Y.-based construction and surety broker Allied North America. But that boost was offset in part by factors that included a 1% decline in organic commissions and fees, Aon said.

Whether brokers’ cost-cutting is sustainable remains in question and varies by company depending on whether they still have redundant personnel that can be eliminated, Mr. Shields said. Some brokers have merely reduced travel and entertainment expenses, which is not sustainable in a relationship business, Mr. Shields added.

Observers hoped rates would improve for brokers this year, “but what we have learned in the last few weeks is that is not the case,” Mr. Gallant said. “I think hopes (that) we will have a turn any time in the next 12 months seem to have gone away.”

Copyright © 2010 Crain Communications, Inc.

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