BROKER RESULTS 1ST HALF: BROKERS FEAST ON ACQUISITIONS DURING FIRST HALF

The second quarter of 1997 was a digestion period for many of the world's largest U.S.-based publicly held brokers, which have gobbled up a slew of other brokerages over the past year.

While integration was the main course, the acquisitions from previous quarters have bolstered most of the broker's top lines during the first half.

All five of the U.S.-based publicly held brokers surveyed by Business Insurance reported revenue increases, four of them in double digits, and all but one reported profit rises for the first six months of the year compared with the same period last year.

Aon Group Inc. reported a 24.2% drop in pretax profits to $91 million after a $145 million special charge taken in the first quarter to cover costs associated with its acquisition of Alexander & Alexander Services Inc. in January. Its parent, Aon Corp., took an additional $27 million special charge in the second quarter to recognize hidden investment losses incurred at A&A prior to the acquisition (see story, page 12).

Both Marsh & McLennan Cos. Inc. and Aon Group, which together acquired five of the world's largest brokers within the past year, say their integration processes are going smoothly and according to plan.

With the exception of Aon's acquisitions of Minet Group, which was completed during the second quarter, and Sodarcan Inc., announced in the second quarter and completed in July, Arthur J. Gallagher & Co. was the only other broker to make an acquisition during the quarter.

Hilb, Rogal & Hamilton Co. and Poe & Brown Inc. turned to internal growth for the quarter but do not rule out the possibility of acquisitions in the third quarter.

Indianapolis-based Acordia Inc. is missing from the ranks of the largest U.S.-based publicly held brokers due to mutual insurer Anthem Insurance Cos. Inc.'s purchase of the broker's remaining shares last month.

Acordia's management and other investors subsequently bought out its predominate property/casualty operations, which had $305 million in 1996 revenues, for $320 million earlier this month (BI, Aug. 4). As part of the sale, Anthem retained certain health and workers compensation claims administration operations, which had revenue of about $40 million. Acordia, which estimated its 1996 revenues at $343.9 million prior to the deal's completion, remains the world's seventh-largest broker, with 1996 revenues of $305 million.

In other brokerage news, Kaye Group Inc.'s stock price jumped 32.56% to $7.13 per share during the week ending Aug. 1. Michael P. Sabanos, senior vp and chief financial officer of the New York-based broker, said the big increase came the day before the company released its second-quarter results.

For the first six months, Kaye's revenues were up 12.2% to $26.4 million, and profits were up more than 500% to $952,000.

Mr. Sabanos said Kaye's $2.9 million acquisition July 1 of Western Insurance Associates of Pasadena, Calif., also may have contributed to the company's share price boost.

Overall, prices continue to remain soft and the market competitive, brokerage executives report.

"We're not losing market share," noted Michael J. Cloherty, executive vp of Arthur J. Gallagher. "We're trading clients here and there. . . today's rate is challenged tomorrow."

"Since the first of the year, there has been a change in the intermediary end of our industry. . .very dramatic change in terms of consolidation," said Andrew L. Rogal, chief executive officer of HRH. "It's a very, very turbulent environment."

"It's sort of blood and guts on the deck each month," added J. Hyatt Brown, chairman and CEO of Poe & Brown.

The first-half results of the individual brokers follow:

Marsh & McLennan

Revenues at the world's largest broker increased 26.2% during the first half to $2.67 billion. Profits also rose 19.8% to $309.4 million.

Second-quarter results reflect, for the first time, M&M's acquisition of Johnson & Higgins, completed earlier this year. J&H added $250 million in revenues in insurance services during the second quarter, noted J. Michael Bischoff, vp-corporate development for the New York-based broker. That caused a 26.8% rise in insurance services revenues for the first six months, to $1.3 billion.

The integration of J&H also began in the second quarter, and 95% of the key management decisions have been made, Mr. Bischoff said. For the next six to nine months, M&M will begin the physical integration of the brokers, deal with the issue of redundant positions and begin to see the cost savings it hopes to achieve, he said.

Overall, "we had a very strong quarter in many respects, not least of which was The Putnam Cos.," Mr. Bischoff said. Revenues for M&M's Boston-based investment management company grew 38.1% during the first six months to $695.8 million.

Consulting services, including those of unit William M. Mercer Inc., rose 14.4% to $652.3 million. Mr. Bischoff said that J&H's benefit consulting unit, A. Foster Higgins & Co. Inc., was fully integrated with Mercer on July 1.

Mr. Bischoff said the slowdown of insurer consolidation after the first of the year yielded better reinsurance revenues, though they are still down about 2% from the same period last year. The dip, however, "is significantly better than the prior five quarters," he said.

Aon Group

First-half revenues catapulted 90.4% to an acquisition-fueled $1.80 billion, while pretax profits fell 24.2% to $91.0 million. Excluding the $145 million charge, pretax profits rose 65.7% to $236.0 million.

Revenues for the year so far include those from Bain Hogg Group P.L.C. and A&A. Revenues from the Minet and Sodarcan acquisitions will be reflected in third-quarter results.

"We're very pleased with the revenue growth," said Patrick G. Ryan, chairman and CEO of Aon Group in Chicago. "The benefits of consolidation and the integration process are reflected in the second quarter."

Excluding acquisitions, revenues were up almost 11%, Mr. Ryan said. He added, however, that he is cautious of the internal growth figure because "a quarter doesn't make a trend. You can have a combination of new business and retention improvement in a three-month period that is beyond the norm."

Nevertheless, consulting and U.S. retail revenues "did very well" and offset reinsurance brokerage revenues, which continue to be down, Mr. Ryan said.

Arthur J. Gallagher

Revenues for the first half of the year increased 4.6% to $228.1 million while profits jumped 41.8% to $22 million.

Second-quarter results were buoyed in part by one-time gains from pension plan restructuring and new office leasing arrangements in the United Kingdom.

Mr. Cloherty said the modest revenue gains are a reflection of the current marketplace. "All lines remain soft and highly competitive," he said.

To offset soft pricing and take advantage of the alternative market, Gallagher is forming ARTEX, a Bermuda-based rent-a-captive operation that will facilitate pooling and captive arrangements for Gallagher clients. Details of the operation still are being set (BI, July 21).

During the second quarter, Gallagher acquired a small general property/casualty broker, Trinder & Norwood & Co. in White Plains, N.Y.

Hilb, Rogal & Hamilton

Revenues at the Glen Allen, Va.-based broker increased 13.9% to $92.2 million during the first half. Net income similarly improved, rising 14.1% to $8.9 million.

While a majority of HRH's commission and fee revenue growth is acquisition-fueled, growth from core operations owned in both six-month periods increased 2.6%. While small, it is a significant change for the company, according to Mr. Rogal. "Never in (HRS') entire history has it shown core top-line growth."

This growth is attributable to the company's focus on improving internal operations, Mr. Rogal said. "If there is one word to describe our company, it would be change," Mr. Rogal said (BI, May 5).

The broker's first-half results include $850,000 it has spent on outside consultants assisting the company with its reorganization, he added.

During the second quarter, HRH made no acquisitions, but Mr. Rogal said some are likely in the third quarter.

Poe & Brown

Revenues for the Daytona Beach, Fla.-based broker increased 11.6% to $66.2 million and profits grew 17.6% to $9.2 million.

An 11.3% rise in commissions

and fees and a 31.2% rise in interest income contributed to the overall revenue growth during the first half of the year. However, those increases were tempered by expenses, which grew 9.6% to $50,993.

Almost all of the growth is internally generated, Mr. Brown said.

"All segments of the business are growing but at a very high physical price. Employees are working more hours and are under more pressure," he said.

While Poe & Brown made no acquisitions during the second quarter, it did acquire Phoenix-based Shanahan, McGrath & Bradley Inc. Aug. 1. Those operations will be merged in with Poe & Brown of Arizona Inc.