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Brokers brace against market forces

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Commercial insurance brokers continue to face strong headwinds in 2017 as they strive to grow in the soft market and a still-sluggish economy.

With organic growth rates in the low single digits and fluctuating foreign exchange values, most of the largest brokers saw only moderate revenue increases or decreases last year. However, some of the acquisitive firms among the 10 largest insurance brokers saw stronger growth, with private equity-owned Hub International Ltd. showing the biggest percentage increase at 12.1%.

In late June, the biggest acquisition of the year so far was announced with USI Insurance Services L.L.C. saying it would purchase Wells Fargo Insurance Services USA Inc. The deal is due to close in the fourth quarter, therefore it is not reflected in the 2017 rankings.

Wells Fargo Insurance fell out of the Top 10 this year due to the sale of its crop insurance agency to Zurich Insurance Group Ltd. last year, and has been replaced by its prospective buyer, USI. If the USI deal goes through as planned, it will nearly double the size of USI, creating a firm with about $2 billion in brokerage revenue.

Just outside the Top 10, growth rates last year often hit double digits as several brokers — particularly those with private equity backing — continued aggressive, acquisition-fueled expansion strategies.

That consolidation continued this year with some notable names in the upper third of the 100 largest brokers of U.S. business being bought by rivals.

In March, Lake Mary, Florida-based AssuredPartners Inc. announced it was buying Keenan & Associates in Torrance, California. Last year, Keenan ranked 22nd with $170.9 million in 2015 U.S. brokerage revenue.

In January, Marsh & McLennan Agency L.L.C., the middle-market agency division of Marsh L.L.C., announced it would acquire J. Smith Lanier & Co. The West Point, Georgia-based brokerage was ranked 30th last year with $132.9 million in 2015 U.S. brokerage revenue.

And consolidation is likely to continue, said Mike Sicard, chairman and CEO of USI.

“There are 36,000 agents and brokers across the U.S., and on average about 400 have traded or been acquired each year for the past several years. So, while the space is consolidating, it would take a very long time — if you do the math, there’s a 100-year supply,” he said.

Outside of acquisitions, the outlook for growth among brokers is “OK but not great,” because their growth rates are tied quite closely to the rates in the commercial insurance market, said Paul Newsome, managing director at Sandler O’Neill & Partners L.P.

Looking forward, the soft market is expected to continue, but a possible increase in general economic activity may aid brokerage growth.

“It has continued to be a soft market … but you have to look at specific lines of business and specific geographies, and you can get very different stories. In general, there’s continued softness on the pricing side but a bit of a lift on the exposure side,” said Michael J. O’Connor, Chicago-based CEO of Aon Risk Solutions.

But if promised political changes come through, brokers could see increased business. In particular, President Donald Trump’s plan to significantly increase infrastructure spending would be a boon to the insurance sector, said J. Patrick Gallagher Jr., chairman, president and CEO of Arthur J. Gallagher & Co.

“If he gets it legislatively approved, that will be fantastic for brokers because that’s going to create construction projects all across the country,” he said.

Consolidation among insurers has been another feature of the past several years, but so far it has not caused problems for brokers or their clients because it has not led to a reduction in capacity, brokerage executives say.

“There is and has been a highly fragmented environment with a large number of high-quality insurers for any given risk, so we have not seen consolidation have a dramatic change on the property/casualty market,” Mr. Sicard said.

The market’s net capacity has grown, “so we haven’t had challenges meeting our clients’ demands. It’s just a matter of us staying on top of those market changes and taking advantage of opportunities for our clients,” said Glenn Spencer, president and CEO of Kansas City, Missouri-based Lockton Cos. L.L.C.’s global operation.

And the increased size of insurers can be beneficial to policyholders, said Mr. O’Connor of Aon Risk Solutions.

“We see that as a positive, as nobody has actually taken capital off the table … they want to maintain or increase line sizes,” he said. In addition, with increased capacity, insurers are more likely to cover previously uninsured risks such as some cyber exposure or reputational risks, Mr. O’Connor said.

Outside of market trends, some brokers have come under fire recently from a high-profile insurer executive. In his annual letter to shareholders, Chubb Ltd. Chairman and CEO Evan G. Greenberg slammed the “abusive behavior” of some brokers. He said brokers, particularly in the London market, charge excessive commissions and force underwriters to “succumb to the lowest common denominator” and warned that brokers could be “disintermediated.”

The criticism may be a feature of the soft market and was unlikely to have much effect in the short term, said Mr. Newsome of Sandler O’Neill.

“It’s not an issue in the short term, but it is an issue in the long term as our world is changing and, looking across all businesses, people want to lower costs in general,” he said.

Market forces do influence compensation, said Meyer Shields, managing director at Keefe, Bruyette & Woods Inc. in Baltimore.

“If companies end up being unprofitable because the rates they’ve accepted are too low, that’s not the broker’s fault. I’m sympathetic to the concern, but I don’t think there’s anything to complain about in terms of what the brokers are doing,” he said.

“While broker remuneration models vary across regions, it’s important to remember the market has evolved and insurance transactions have changed,” Willis Towers Watson P.L.C. CEO John Haley said in an emailed statement.

“The role of the broker is no longer as a simple risk transfer intermediary. Now, we have an entire value chain that we build as a broker and the risk transfer does not happen until the very end. Across risk assessment, analytics and global resources, the way we bring risks to the marketplace is very different today and when brokers achieve the best value for a client, we think it’s mutually beneficial.”

Some London brokers are also coming under regulatory scrutiny. In April, Jardine Lloyd Thompson Group P.L.C., UIB Group, Marsh Ltd., Aon P.L.C. and Willis Ltd., the U.K. brokerage subsidiary of Willis Towers Watson P.L.C., all acknowledged that they are being investigated by the U.K.’s Financial Conduct Authority for allegedly sharing competitively sensitive information within the aviation and insurance sectors.

None of the brokers would comment beyond statements they made at the time. An FCA spokeswoman said the authority does not comment on ongoing investigations.

Gloria Gonzalez, Judy Greenwald, Rob Lenihan, Matthew Lerner and Sarah Veysey contributed to this report.