3Q Results for Insurance Broker’s Profitable—for Most

The four major global insurance brokers 3rd quarter revenue
continued a positive trend--for the most part. 

By Mark E. Ruquet

If the four major U.S. insurance brokers are any indication, producers should be enjoying continued revenue growth through 2013 as commercial premiums continue their steady climb, despite signs that the industry may be reigning in rate increases in some lines of business.

Within the past two weeks Marsh & McLennan, Aon, Willis and Arthur J. Gallagher reported third quarter revenue growth ranging from 2 to 5 percent, with Arthur J. Gallagher outperforming the group.

AJG reported the largest third quarter revenue jump of the four at 29 percent to $836 million, and organic growth of more than 6 percent. Despite its success, the broker missed investment analyst’s consensus earnings by 5 cents a share, coming in at 57 cents or net income of $75 million. AJG’s performance for the first nine months of this year reflects the same strength with revenues increasing 24 percent to $2.3 billion and net income up 29 percent to $209 million.

Willis had the next best results—in terms of revenue—for the quarter as revenues were up 5 percent and organic growth was just shy of 6 percent. Revenues beat analyst consensus estimate by close to $9 million. A net loss of $27 million, or loss per share of 15 cents, tempered the broker’s results. Willis blamed the loss on the early extinguishment of debt to the tune of $60 million and expense of $1 million for related fees. Judging the brokers performance based on adjusted net income for continued operations, the firm missed consensus by 1 cent coming in at 19 cents a share. So far this year, revenues increased 5 percent over the first nine months to $2.74 billion, while net income dropped 17 percent to $297 million.

Aon managed to beat analyst’s expectations with earnings per share beating consensus by 9 cents a share. The firm’s net income rose 25 percent to $256 million on revenue of $2.8 billion, an increase of 2 percent. Earnings per share rose 20 cents to 82 cents a share. For the nine months, net income was up 10 percent to $758 million, with revenue increase of 2 percent, or $207 million, to $8.6 billion. The firm reported organic growth overall of 3 percent driven by its risk solutions business.

Marsh & McLennan appears to have regained its position as the top brokerage firm, reporting third quarter revenues of more than $2.9 billion, an increase of 3 percent over the prior year. Net income rose 5 percent to $253 million. The results were in line with analyst’s expectations. Revenues over the nine months rose 2.5 percent to $9.15 billion with net income of $1.05 billion, up 15 percent. The company’s risk and insurance segment, made up primarily of insurance broker Marsh and reinsurance broker Guy Carpenter, showed revenues for the third quarter and nine months of this year up 4 percent to close to $1.5 billion and $4.96 billion, respectively. Organic growth for both periods increased 3 percent.

The chief executives at all four firms were upbeat about their company’s performance.

Willis’ Chief Executive Officer Dominic Casserly said the firm delivered “strong top line growth” and a strengthened balance sheet by refinancing portions of its near term debt to take advantage “of the favorable debt market.”

Aon’s CEO Greg Case said the firm “is on track for a solid finish to 2013 and continues to strengthen the platform of long-term growth, strong fee cash flow generation and increased financial flexibility in 2014.”

AJG’s Chairman, President and CEO, J. Patrick Gallagher Jr. had the most to crow about in the company’s performance, scoring two major acquisitions in the third quarter with New Jersey-based Bollinger and London-based Giles Group of Companies. AJG expects the two to generate over $240 million in revenue, adding 1,600 employees to the firm. Gallagher was probably speaking for many of the brokers when he said the firm is “encourage by the state of the rate environment, adding, “We believe we are in a new era of proactive and rational rate setting by carriers, which bode well for the brokerage industry.”

However, if there was anything to give pause to the celebration in revenue growth, there was the release of the October MarketScout Barometer that indicates a slight drop in overall rate increases by 1 percent for both commercial and personal lines from the previous month. MarketScout’s CEO Richard Kerr said the drop was “a slight loss of steam” that needs to be watched. He attributed the drop in personal lines to the light catastrophe season. Commercial lines witnessed dramatic decreases in businessowners policies—from plus-5 percent to plus-3 percent—and general liability rates—from plus-6 percent to plus-3 percent.

Another view of the markets came from Steven P. Hearn, Chairman and CEO of Willis Global explaining during a conference call that reinsurance rates on the global stage are down 5 percent overall, and lower on North America to as much as 25 percent. On the insurance side, he said Property and Casualty is up as much as 5.5 percent. He pointed out that while rates affect revenues, Willis’ performance also comes from fees and new business—which was very strong for Willis and the other brokers cited new business as one important ingredient driving their revenue.