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Big insurance brokers report gains in revenue

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The largest insurance brokerages increased their revenue for the first nine months of 2011 despite the sluggish economy and largely soft rates.

But with rate increases in catastrophe-exposed property lines and some signs of economic growth, the outlook for the five largest publicly traded brokers is slowly improving, analysts say.

While soft pricing and the weak economy affect all of the largest brokers, acquisitions were a factor in some results. Profitability, meanwhile, remains mixed as brokerages face their specific challenges.

“Companies seem to cite continued challenging economic conditions and a continued challenging pricing environment, but with pockets of improvement,” said Bruce Ballentine, an analyst in New York at Moody's Investors Service Inc., who cited emerging economies and higher cat pricing as positive factors.

“We're seeing less negative momentum,” said Meyer Shields, an analyst for Baltimore-based Stifel, Nicolaus & Co. Inc.

Marsh & McLennan Cos. Inc. performed particularly well, analysts say. The New York-based brokerage reported revenues of $8.62 billion for the first nine months, up 10.9% compared with a year earlier. Its profit rose 13% to $737 million.

Cliff Gallant, an analyst with Keefe, Bruyette & Woods Inc. in New York, attributed Marsh's performance to a return to fundamentals over the past several years and simplifying its operations, such as selling New York-based consultant Kroll Inc. for $1.13 billion in June 2010.

“They're probably in the strongest shape they've been in for many years,” Mr. Gallant said.

Other analysts concurred. For example, Standard & Poor's Ratings Service on Nov. 11 revised its outlook on Marsh to “stable” from “negative.” The New York-based rating agency said the brokerage's operating results began showing significant improvement in the fourth quarter of 2010 after several years of restructuring the business.

In addition, Marsh & McLennan Agency L.L.C. continues building out its middle-market business with acquisitions. “MMA is definitely a positive help to the bottom line (for Marsh), but I'd say the bigger thing is just basic blocking and tackling and getting it right” on the fundamentals, Mr. Gallant said.

Aon Corp. reported nine-month 2011 revenues of $8.29 billion, up 48% over 2010, and its profit also rose 48% to $702 million, due mainly to its 2010 acquisition of benefits consulting and outsourcing firm Hewitt Associates Inc.

Revenue for Aon Risk Solutions increased 7% to $4.99 billion for the first nine months of the year, but revenue for its HR Solutions unit jumped 246% to $3.32 billion, reflecting the impact of Hewitt.

Organic revenue in Aon's HR Solutions group fell 2% in the third quarter to $1.11 billion. Aon management, which had forecast modest improvement, said in a conference call that the decline was due mainly to lower project-related revenue in outsourcing and weaker results in consulting businesses in Europe, the Middle East and Africa.

“Certainly you've seen weakness in Aon on the HR consulting side, which is...not all that surprising, given some of the economic uncertainty you're seeing in Europe,” said Ray Iardella, New York-based vp and senior property/casualty insurance analyst at Macquarie Securities Group.

London-based Willis Group Holdings P.L.C. reported revenues of $2.63 billion for the first nine months, a 5.2% increase. The brokerage's North America segment reported $998 million in revenues, down 2% compared with last year. But its international business grew 13% to $746 million.

Other brokerages also had healthy overseas business. For example, Marsh increased its international revenues by 13% year over year to $2 billion in the first nine months of the year, at the same time it increased U.S. and Canada revenues by 10% to $1.8 billion.

For Willis, an ongoing operational review, which included staff cuts, resulted in about $96 million in charges for the first nine months of 2011.

Willis Chairman and CEO Joseph J. Plumeri said rates overall were flat to slightly down year-over-year in the quarter. He added that U.S. and European economic news “remains pretty bleak,” but he also said there have been a few “bright spots” in areas such as emerging economies.

Despite its revenue growth, Willis reported a 48% drop in its nine-month profit to $179 million. Willis' 2008 acquisition of Hilb Rogal & Hobbs Co. included the middle-market brokerage's loan protector business, which provides lender-placed insurance to the mortgage servicing industry. After the loan protector business lost clients in recent months through attrition or mergers and acquisitions, Mr. Plumeri said he expects it to earn $10 million to $14 million this year vs. $41 million last year, due in large part to commission pressures and banks slowing foreclosure activity.

“I think (Willis is) still positioned well for the future, but they face the same macroeconomic uncertainty as everyone else in the group,” Mr. Iardella said.

For Daytona Beach, Fla.-based Brown & Brown Inc., a high concentration of business in Florida and other economically troubled states such California and Michigan affected its results. During the past four or five years, more clients were acquired or went out of business than has historically been the case, and that trend hasn't abated, President and CEO J. Powell Brown said during a conference call.

The “economy continues to present challenges in growing our business,” he said.

Brown & Brown's nine-month revenue increased 3.5% to $769.4 million, which Stifel Nicolaus' Mr. Shields attributed to a “less painful” U.S. market environment. However, its profit fell 1.6% to $127.5 million due largely to its Florida property exposures.

Arthur J. Gallagher & Co.'s revenue from continuing operations rose 10.8% to $1.56 billion for the first three quarters of 2011 compared with the same period of 2010. But the Itasca, Ill.-based brokerage's net income fell 13.2% to $103.6 million, as its costs increased and it continued integrating U.K. broker Heath Lambert Ltd., which it bought in May.

Analysts remain cautious about the outlook for the brokerage sector.

“There's a lot of (investor) optimism about the rate environment turning and the economy picking up,” said Mike Grasher, senior equity analyst at Piper Jaffray & Co. in Chicago. “At the same time, there's a lot of uncertainty remaining.”

“I think it depends on the rate picture and the economy as much as anything,” said Mark Dwelle, an equity insurance analyst in Richmond, Va., at New York-based RBC Capital Markets L.L.C.

“If those continue to strengthen—as they've shown signs of doing—that should be a positive, but I don't think either of those trends is sufficiently clear to necessarily be sure,” he said.