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Organic growth, M&A activity drive broker results

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The five largest publicly traded insurance brokers posted a collective single-digit increase in 2015 revenue thanks to modest organic growth and expense reductions as mergers affected their ranks.

Some analysts, however, expect organic growth to challenge the brokerage space this year.

2015 was “better than expected,” said Timothy J. Cunningham, managing director at Chicago-based investment banking and consulting firm Optis Partners L.L.C. “The fourth quarter was an uptick.”

“Overall, it was a solid year for brokers,” with most reporting organic growth and steady or slightly improving margins, said Julie Herman, New York-based associate director of insurance rating at Standard & Poor's Corp.

The two largest brokers, Marsh & McLennan Cos. Inc. and Aon P.L.C., reported slight declines in 2015 revenue. Arthur J. Gallagher & Co., Willis Group Holdings P.L.C. — before the completion in January of its $18 billion merger with Towers Watson & Co. — and Brown & Brown Inc. improved their top lines.

Aon was the only member of the top five to report 2015 net income that was less than 2014.

Collectively, the top five had $35.46 billion in 2015 revenue, a 1.3% increase, and $4.04 billion in net income, a 6.1% gain.

Foreign exchange rates were the major headwind global brokers faced last year, “but they managed through it well,” Ms. Herman said.

Organic growth rates were “very consistent” with increases generally in the 3% to 5% range, said Bruce Ballentine, vice president and senior credit officer at Moody's Investors Service Inc. in New York. “This is a good steady growth, and it's a little ahead of economic growth.”

Some analysts foresee future organic growth as a problem.

“Acquisition revenues have been especially strong in firms like Gallagher, but as the commercial pricing cycle softens, organic growth will be a challenge for the entire segment,” said John L. Ward, CEO of Loveland, Ohio-based private equity firm Cincinnatus Partners L.L.C. “Organic growth for the segment in general has dropped from mid-single digits in recent years to being pretty flat now.”

Acquisition “remains a reasonable additional source of growth, either enhancing existing platforms or with diversification of revenue streams,” said Gretchen Roetzer, director and group operations head at Fitch Ratings Inc. in Chicago.

Willis' merger this year with Towers Watson will tap their respective strengths, said Ms. Herman.

“Marsh and Aon dominate the large-accounts space in the U.S.,” she said. “Willis has a lot of large accounts internationally, but less so in the U.S.; and Towers had a lot of those on the benefits side in the U.S., so they will try to use the Towers network to penetrate that large-account space in the (property/casualty) brokerage world.”

However, Ms. Herman said, “it remains to be seen whether or not they can. Towers is big in benefits in the U.S. and Willis has a good network of large accounts internationally. I think they rounded each other out in the areas they were looking to penetrate.”

Willis Towers Watson is a “bigger and more balanced organization, with an improved balance sheet from putting these two companies together,” said Mr. Ballentine.

Analysts differed on whether increases in interest rates or debt will slow M&As in 2016.

“I think we are in the final phase of the mergers and acquisition frenzy of the last several years” that was fueled by private equity buyers and a strong debt market, said Mr. Ward.

M&As may be tempered if interest rates rise, but acquisitions remain a likely source of growth, Ms. Roetzer said.

Ms. Herman doesn't see the space changing from economic shifts.

“Willis and Towers was a big deal, but most of the deals were in the small- to middle-market space,” Ms. Herman said. With more than 30,000 insurance brokers in the United States, “the small to middle market is very fragmented” and private equity buyers are accelerating consolidation, she said.

“The demand is still there,” Ms. Herman said. “Going into 2016, I see another active year.”