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Rates, economic recovery, acquisitions propel broker growth in 2012

Insurance brokers see revenues flourish in 2012

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Rates, economic recovery, acquisitions propel broker growth in 2012

A combination of higher insurance rates, the ongoing economic recovery and acquisitions propelled all but one of the brokers in Business Insurance's new ranking of the world's 10 largest brokers to increased brokerage revenue in 2012.

On a percentage basis, BB&T Insurance Holdings Inc. reported the biggest brokerage annual revenue growth, up nearly 34.1% from 2011. Five other brokers also posted double-digit percentage growth in brokerage revenue in 2012: Brown & Brown Inc., up 20.6% from 2011; Arthur J. Gallagher & Co., up 14.0%; Hub International Ltd., up 12.6%; Jardine Lloyd Thompson Group P.L.C., up 11.3%; and Lockton Cos. L.L.C., up nearly 11.3%.

Rounding out the top 10, Marsh & McLennan Cos. Inc. said its brokerage revenue increased 3.5% in 2012 from 2011, Aon P.L.C.'s brokerage revenue rose 2.2%, and Willis Group Holdings P.L.C.'s brokerage revenue advanced 1.3% from its 2011 level.

Only Wells Fargo Insurance Services USA Inc. reported a decline in 2012 brokerage revenue, a drop of nearly 3.2% from its 2011 level. Wells Fargo officials attributed the decline to being a smaller company after selling pieces of its business in recent years.

Industry analysts attributed the brokerage revenue growth among most of the top brokers to the combination of improved economic and market conditions.

“I think the environment's better. We're getting some rate and we're getting exposure expansion, both of which are good for the broker,” said Timothy J. Cunningham, managing director at Optis Partners L.L.C. in Chicago.

“Rates seem to be hardening. That seems to help everybody,” said Kevin P. Donoghue, managing director at Mystic Capital Advisors Group L.L.C. in New York.

Phil Trem, vice president at Marsh Berry & Co. Inc. in Willoughby, Ohio, said improved conditions have made organic growth the norm for agents and brokers. “Organizations who historically for the last couple of years were seeing negative organic growth ... are starting to see growth as an average,” Mr. Trem said. Across the country, agents and brokers averaged 4% organic growth in 2012, he said.

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Another analyst, Meyer Shields, managing director for Keefe, Bruyette & Woods Inc. in Baltimore, said most of the brokerage revenue growth is due to better economic conditions and the consequent increase in underlying insured values. The past few years, he said, have highlighted for all brokers “that economic growth is probably a bigger deal than rate changes in the insurance market.”

With the economic recovery an important factor in brokers' improving fortunes, many of the largest brokers are likely to look to areas of the world where economic growth is the greatest, according to one analyst.

“Here in the States, the growth over the next five to 10 years, most people will tell you, is going to be 3% to 5%, whereas in Latin America, which is in our backyard, it's going to be 7% to 10%. Therefore, brokers have shown interest in that market,” said John W. Wicher, principal at John Wicher & Associates Inc. in San Francisco.

Africa is another area where some brokers will look for growth opportunities, Mr. Wicher said.

“Both Aon and Marsh completed deals in Africa last year,” he said. “The reality is certainly the largest brokers are following their global clients, and that means expansion in Latin America, in Africa.”

All of the 10 largest brokers derive a significant portion of their revenue from employee benefits business, and it's likely their emphasis on that sector will increase as employer clients look to address U.S. health care reform requirements.

The 10 largest brokers ranked by percentage of their 2012 revenue coming from employee benefits business were: Marsh with 34.7%; Lockton with 26.5%; JLT with 23.1%; Aon with 19.3%; Gallagher with 18.9%; Brown & Brown with 16.4%; Hub with 15.5%; Wells Fargo with 15.3%; Willis with 15.1%; and BB&T with 10.1%.

The U.S. health care reform landscape could prove difficult for resource-challenged smaller brokers, according to analysts, providing more acquisition opportunities for larger brokers.

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“You will see smaller brokers probably forced to consider acquisition because of the uncertainty of health care reform,” Mr. Shields said.

From the perspective of some of these small brokers, however, “For some organizations that are just starting to see that, it may be too late,” Mr. Trem said of the window for smaller brokers to sell their operations. Of the 325 announced agent and broker acquisitions in the U.S. in 2012, 81 were benefits brokers, he said, while through May of this year, 18 of 67 announced deals involved benefits brokers.

The deals being sought by acquirers, though, are typically smaller brokers that already have distinguished themselves by offering a more consultative approach to benefits business and greater value than simply placing coverage, Mr. Trem said. Small benefits brokers that have been purely transactional may be finding buyers, but at a discounted selling price, he said.