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Brokers step up merger activity

Buying out rivals helps larger firms keep growing in soft market

Brokers step up merger activity

Despite a still-soft commercial property/casualty insurance market, insurance brokers have performed fairly well over the past year or so. The record merger and acquisition activity, encompassing the blockbuster joining of Willis Group Holdings P.L.C. and Towers Watson & Co. as well as hundreds of smaller transactions, established larger entities that are better able to compete in the marketplace.

Questions remain, however, about the pace of economic growth on which brokers depend for new business as well as their ability to post healthy organic growth.

Still, most analysts like what they have seen in the past year.

“Generally, the broker marketplace is in a good spot,” said Phil Trem, senior vice president at Woodmere, Ohio-based Marsh Berry & Co. Inc. “A lot of organizations are getting bigger, and that's a key factor in overall success. It continues to be a great business.”

Quentin McMillan, director of equity research at Keefe Bruyette & Woods Inc. in New York, said brokers have outperformed the stock market as a whole in all five of the most recent recessions.

They continue to have very positive attributes,” Mr. McMillan said. “My overall high-level view is that the brokers are going to be fine going forward.”

As has usually been the case, M&As shuffled Business Insurance's list of the top 100 brokers of U.S. business, ranked by 2015 brokerage revenue.

In the biggest deal, Willis completed its $18 billion acquisition of Towers Watson to form Willis Towers Watson P.L.C. That 129.7% brokerage revenue increase moved Willis Towers Watson back into the No. 3 slot among brokers of U.S. business, surpassing Arthur J. Gallagher & Co. Inc., which slipped to No. 4 (see chart, page 22).

Also in the top 10 for U.S. business, Hub International Ltd., buoyed by a 26.4% increase in revenue in a year in which its acquisition hunger with 43 deals showed no signed of abating, moved from No. 10 in last year's ranking to No. 8 this year. That dropped USI Insurance Services L.L.C. and Lockton Cos. L.L.C. one spot each, to No. 9 and No. 10, respectively.

Private equity-backed Acrisure L.L.C. also continued its acquisitive ways with more than 50 and boosted its U.S. brokerage revenue 114.7% to move up to No. 14 this year.

Another private equity-backed brokerage, Prime Risk Partners Inc., boosted its revenue 131.7% with the acquisition of Cook Maran & Associates Inc., moving Prime Risk Partners up to No. 50 in the 2016 ranking.

Of course, M&As meant some familiar players of the top 100 U.S. brokers left the list as they became part of larger operations. For example, No. 1 Marsh & McLennan Cos. Inc. continued to bolster its middle-market-focused Marsh & McLennan Agency by acquiring MHBT Inc. and J.W. Terrill Inc. In addition, No. 4 Gallagher acquired William Gallagher Associates Insurance Brokers Inc.

“M&A is very notable in the U.S. market,” said Julie Herman, director of financial services ratings at Standard & Poor's Corp. in New York. “There have been more deals in the U.S. insurance broker market than in any other insurance market.”

“2015 was the most active we've seen in history, with 456 total announced deals,” said Marsh Berry's Mr. Trem. Private equity-backed brokers accounted for 212 of those deals last year versus just one in 2006, he said.

He noted that the 162 announced deals during the first five months of 2016 is second only to the record 192 deals during the same period last year.

“We expect about 400 transactions in 2016,” Mr. Trem said.

The brokerage world remains “very fragmented, particularly in the middle-market space, Ms. Herman said. “There's a very active supply. There are thousands of potential acquisitions and high buyer demand.”

Paul Newsome, managing director at Sandler O'Neill & Partners L.P. in Chicago, said smaller brokerage operations are the biggest M&A targets. While larger brokers are not as active as midsize brokers in purchasing small brokers, “it's important for the midsize brokers” to enhance their competitiveness in the marketplace.

Aside from the soft market, two other factors have negatively affected brokers' performance, Mr. Newsome said.

One is slow global economic growth. “These companies are dependent on the general level of economic activity,” he said.

The other is foreign currency exchange. “Last year in particular, currency has hampered reported earnings” amid a strong U.S. dollar, Mr. Newsome said.

“The U.S. brokerage market can only grow as fast as the economy because it's a mature market,” said John W. Wicher, principal of investment banking adviser John Wicher & Associates Inc. in San Francisco. “It's hard to imagine some transformational event that would change the insurance product. Technology is changing how the product is distributed.”

Generating organic growth from existing customers also remains a challenge for U.S. brokers.

“Robust organic growth is not so easily achievable,” said S&P's Ms. Herman. “You really have to work” for organic growth.

“Agencies ended up at a much lower overall organic growth than in prior years,” Mr. Trem said. “At the end of 2015, we were seeing organic numbers come in around 4.4% as opposed in the 6% to 7% range over the last three years. Basically, we're seeing a softening market on the P/C side.”

Mr. Trem foresees little change in the next year.

Historically, “the average agency continues to write 12% to 14% in new business over the prior year. The top-performing agencies typically write 18% to 20%. We expect more of the same in 2016. Our expectation is that organic growth will likely be less in 2016, below 4%,” he said.

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