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Commercial insurance brokers posted solid first-half results amid a slowly improving economy that boosted organic growth.
The top five publicly traded brokers improved their collective revenue by 7.7% to reach $17.32 billion in the first six months of 2014, and their collective net income by 10.4% to reach $2.07 billion.
Both Arthur J. Gallagher & Co., which surpassed Willis Group Holdings P.L.C. in first-half revenue, and Brown & Brown Inc. reported double-digit revenue gains due in large part to a series of acquisitions, analysts said.
Aon P.L.C. posted the largest percentage increase in net income, driven largely by operating margin gains in its risk and human resources solutions units as well as $100 million in savings in its ongoing restructuring of Aon Hewitt.
However, brokers with large reinsurance brokerage operations — such as Aon, Willis and Marsh & McLennan Cos. Inc. — face a challenging reinsurance rate environment, analysts said.
In addition, brokers' private health insurance exchanges did little to bolster brokers' bottom lines (see related story).
First-half 2014 results were “solid” and brokers did “pretty well” overall, said Greg Dickerson, New-York-based analyst at Fitch Ratings Inc. “You see organic growth in positive territory across the board, and margins have held up pretty well also.”
“Most brokers had overall low- to mid single-digit organic growth while margins on the whole were relatively stable,” said Julie Herman, New York-based analyst at Standard & Poor's Corp.
“I would say organic growth continued to hold up well,” said Dan Farrell, managing director at Sterne Agee Group Inc. in New York. “Generally speaking, organic growth is still trending well.”
Growth in insurance exposures brought about by the slow but steady improvement in the overall economy was a key element of brokers' earnings.
“I think that's actually the biggest driver of organic growth —continued moderate economic and exposure improvement,” Mr. Farrell said. “I think the brokers can continue to have positive organic growth if the economy is growing and as exposures are growing.”
“You have more construction projects, businesses and payrolls are expanding — though not at a rapid rate but at least in positive territory — so you're seeing some incremental insured exposure growth,” Mr. Dickerson said.
Ms. Herman said she is seeing steady to gradual improvement in insured U.S. exposures and “stabilized higher growth in emerging markets,” but Europe remained “a little fragile.”
But on the reinsurance front, soft prices “certainly presented a headwind for those brokers that have significant reinsurance practices,” Mr. Dickerson said.
“Reinsurance brokerage is the one area where we're seeing some signs of some weakening of the organic growth, and that's because the pricing declines are more severe there,” Mr. Farrell said.
Brokers such as Marsh, Aon and Willis, and to a smaller degree Gallagher, also faced foreign currency exchange issues that “hurt the global brokers a little bit in the first half of the year,” Ms. Herman said.
While acquisitions boosted Gallagher and Brown & Brown, integrating the business may pose challenges.
“Gallagher has made what for them has been a series of very large acquisitions, some internationally, outside their core business in North America,” Mr. Dickerson said of Gallagher's purchase in the past year of brokerages in Australia, New Zealand and the United Kingdom.
“I think that's going to be somewhat of a distraction for them. They're going to have to be integrating fairly sizable operations - sizable relative to their current size - in international markets with which they may not be fully familiar,” he said.
Gallagher's challenge “is going to be integrating those transactions,” said Timothy J. Cunningham, managing director at Chicago-based investment banking and consulting firm Optis Partners L.L.C.
“I think Brown & Brown faces the same challenge,” he said. “Though they've had a long history integrating acquisitions, the Wright risk is fairly new,” Mr. Cunningham said of Brown & Brown's $602.5 million January acquisition of Wright Insurance Group L.L.C., including 15 offices in 11 states.
“It remains to be seen if (Gallagher and Brown & Brown) will slow down with their traditional, smaller fold-in deals given the large transactions they've been involved in,” said Mr. Cunningham.
A slowdown in rate increases, an uptick in weather-related and other property losses, and ongoing low investment returns weighed on the largest commercial property/casualty insurers' first-half results.