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Higher prices and economic growth drive 2013 broker profit


Improved margins, higher prices, general economic improvement and organic growth helped the largest insurance brokers turn in strong 2013 results.

“I think it was a good year for the brokers,” said Julie Herman, associate director at Standard & Poor's Corp. in New York.

“I would say the results are good,” said Cliff Gallant, an analyst with Nomura Securities International Inc. in San Francisco.

“This was a strong quarter and a strong year,” said Bruce Ballentine, senior credit officer at Moody's Investor Service Inc. in New York.

Analysts said organic growth and margin improvement helped drive major insurance and reinsurance brokers to at least double-digit net income growth in 2013. The top five brokers had $32.27 billion in 2013 revenue, up 5.3% from 2012, and net income of $3.32 billion, an 11.6% rise.

A slowly improving economy and pricing strength also aided 2013, but 2014 could see pricing momentum change, some experts said.

“If you look at the major drivers of performance, you have organic growth revenue and then you have margin improvement or deterioration,” said Paul Newsome, Chicago-based managing director at investment banking firm Sandler O'Neill & Partners L.P.


Aon P.L.C., Marsh L.L.C. and Willis Group Holdings P.L.C. “all had reasonably good organic growth numbers,” Mr. Newsome said while noting the brokers' mixes of fee-based and commission-based business differ.

Ms. Herman agreed. While Marsh and Aon have consulting arms, Gallagher has less consulting but also has a claims adjudicating unit, he said.

“Organic growth is usually the first indicator that these companies talk about,” said Mr. Ballentine. “Interestingly, all three — Marsh, Aon and Willis — came in at 4% organic growth for the quarter. That's pretty steady for the sector, and for all of them it was reasonably well-balanced across their various businesses.”

“Brokers have benefitted from organic growth in an overall better insurance market,” said Jim Auden, managing director at Fitch Ratings Inc. in Chicago. “Expense and restructuring initiatives over the past few years look like they are bearing fruit and bringing margin improvement across the board.”

Cost management has helped Marsh see steady margin improvement, said Mr. Gallant. Aon has also made progress, but fourth-quarter margins at Willis declined due to less successful cost management, he said.

Willis' fourth-quarter margins were a disappointment to analysts, said Mr. Gallant, partly due to restructuring costs during the period. During its earnings call, broker executives discussed new hires and investments in systems to improve long-term growth, but this “costs money,” said Mr. Gallant.

Some brokers have had more consistent margins over time, said Mr. Auden.


“Brown & Brown (Inc.) has probably been the strongest of that group,” he said.

“A good chunk of earnings growth, which was greater typically than the revenue growth, came from margin improvements, and you saw that at Aon and you saw that at Marsh,” said Mr. Newsome. “All three have publicly said that improving margins over time, at least for the next several years, is a focus for them.”

Willis was the exception. “They were not able to achieve that margin expansion in the fourth quarter,” Mr. Newsome said.

An improving economy and higher prices helped.

“There is a very slight overall tail wind from pricing and the economy,” S&P's Ms. Herman. On the U.S. premium pricing side, rates will continue to rise this year, but at a slower rate than 2013, she said.

“There are definitely signs that the rate of rate increases is slowing, but that varies” from line to line, said Mr. Auden.