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Various exceptional items took a toll on three of the world's largest publicly held brokers' bottom lines in the first half of 1998, while two others enjoyed profit gains derived from their recent megamergers.
All five of the world's largest publicly held brokers surveyed by Business Insurance reported higher first-half brokerage and consulting revenues, but profits took a tumble for three.
Most significantly, Willis Corroon Group P.L.C. reported a $13.2 million loss for the half, while Sedgwick Group P.L.C. reported a $15.5 million loss and Arthur J. Gallagher & Co. reported a 7.7% dip to $20.3 million.
Both Sedgwick and Willis Corroon took charges to their six-month results for provisions related to a U.K. crackdown on misleading pension sales. Willis took a L25 million write-off in the first half for reparations made on 8,000 pension cases under review.
Sedgwick, which previously estimated the liabilities for its 25,000 pension review cases at L35 million using government guidelines, made an L80 million provision in its six-month figures. That provision includes a premium to fund an alternative risk transfer mechanism placed with Bermuda and U.K. insurers that would provide an additional L37 million ($61 million) in coverage, plus an option on a L25 million ($41.2 million) excess layer above that.
"We are trying to take out as much uncertainty as possible," said Rob White-Cooper, Sedgwick's chief executive officer. The facility is the first of its kind, and Sedgwick has pioneered ART mechanisms for clients' asbestos and pollution exposures, including the recent $800 million placement for Hanson P.L.C. (BI, Aug. 10). Other companies hit by the misselling problem could buy into a similar mechanism through Sedgwick.
Arthur J. Gallagher's six-month profit decline is attributable to a one-time $6.2 million gain in the second quarter of 1997, when it sold two underperforming offices.
Executives from Marsh & McLennan Cos. Inc. and Aon Corp., on the other hand, say savings from their recent megamergers have helped boost their bottom lines in 1998. M&M reported a 37.2% rise in net income to $424 million, while Aon's profits improved more than 200% to $277.8 million in the half.
While the U.K. pension misselling may be hitting London broker's balance sheets, observers seem more focused on the future of Willis Corroon.
Last month, Willis announced that Trinity Acquisition P.L.C., a consortium led by U.S. private equity firm Kohlberg Kravis Roberts & Co. L.P. with five insurers, issued a L951 million ($1.56 billion) offer to acquire a majority stake in the world's fourth-largest broker (BI, July 27).
If stockholders approve the deal this month, Willis will become a private broker. In the middle of last week, Willis Corroon said it had not received a counterbid.
While the deal is seen as similar to American International Group Inc.'s $200 million cash infusion into then-struggling Alexander & Alexander Services Inc. in 1994, the issue of vertical integration and potential conflicts of interests between Willis and its insurer investors has raised some concerns among risk managers (BI, Aug. 3).
Competing brokers have various opinions regarding vertical integration and the Willis deal.
"The issue of vertical integration has been in evidence for the better part of the last 15 to 20 years," noted J. Michael Bischoff, vp-corporate development for Marsh & McLennan in New York. "Generally, our feeling is the two should be separate," he said, referring to underwriters and brokers. "There are lots of examples throughout the world where underwriters owning brokers and brokers owning underwriters just hasn't worked out," he said.
Mr. Bischoff added he believes the insurers investing in Willis are doing so to keep the distribution system open and the deal should not be viewed as vertical integration.
"Willis is a very good company," said Patrick G. Ryan, chairman and chief executive officer of Aon Group in Chicago. "They obviously felt they needed to make a change in their shareholding base. We have to wait to see if they can run the company better as a private company rather than a public company."
The proposed Willis deal also has put a spotlight on Sedgwick, which has said it is willing to enter a merger or acquisition under the right conditions.
"We talk to lots of people about lots of things all the time," said Sedgwick Chairman Sax Riley when asked if they had spoken to Kohlberg Kravis Roberts & Co. "We are reviewing all our options because, basically, the game is changing all the time," he said, and the intermediary business is moving closer toward consulting and service business.
Individual results of the world's largest publicly held brokers follow:
Marsh & McLennan
Revenues from Marsh & McLennan's insurance services and consulting operations grew 21.4% to $2.38 billion during the first half of 1998.
Including revenues from its Boston-based investment management unit, The Putnam Co., and M&M's corporate investment income, total corporate revenues grew 24.3% to $3.54 billion in the half. Corporatewide profits likewise grew, bolting 37.2% in the first half to $424 million.
The second quarter reflects, for the first time, the acquisition of Johnson & Higgins in both 1998 and 1997 figures. Revenues from the combined insurance services and consulting operations of J&H and M&M were up 6.3%, to $1.16 billion, for the three months ending in June.
The integration of the brokerage giants is nearly complete, Mr. Bischoff added. Efforts are now focusing on integrating the London operations and relocating about 1,000 employees in nine offices into two new offices, he said. After that, "the last thing left with the integration is systems," he said, adding that that process will be complete by the end of 1999.
M&M estimates that the entire acquisition will result in net savings of between $120 million and $130 million when the integration is complete. Of that, $75 million will be realized throughout 1998, Mr. Bischoff said. For the first six months, "We're very much on track with that."
In terms of the operating environment, there is "absolutely no general change in conditions, which means it's still a very competitive market. . .with price declines in most lines of business," Mr. Bischoff said.
Considering market conditions in the first half, M&M did well, he said.
Mr. Bischoff specifically points to M&M's benefit consulting unit, William M. Mercer Inc., whose revenues increased 11.5% to $727 million during the first half, as one of the factors in the company's overall growth so far in 1998.
He attributes the growth to the combination of a strong economy, global positioning and innovative products.
Revenues from Aon's brokerage and consulting unit, Aon Group Inc., are up 19.2% to $2.15 billion for the first half.
Corporatewide revenues, including those derived from Aon Corp.'s underwriting operations, are up 14.6% to $3.2 billion for the half. Corporatewide profits are up more than 200% for the half to $227.8 million.
Broken down, revenues from Aon's retail brokerage, reinsurance brokerage and specialty business are up 20.5% to $1.84 billion in the first half, and consulting revenues are up 11.7% for the year to $305.3 million.
"Aon Group had particularly good new business, and I would say that really helped overcome the very tight market and difficult pricing," Mr. Ryan said. "We had good reinsurance and retail new business growth, particularly in the U.S., and retention was good particularly in Europe," he said.
Revenues from its consulting business were not as large in the second quarter as in the past, increasing only 7.6%, due to some "temporary" client relationship problems with the auto consulting business, Mr. Ryan said, specifically pointing to the recent General Motors Corp. strike.
Mr. Ryan said Aon "is on track" with its savings estimates of $300 million this year from the acquisitions it made in 1997.
In July, Aon announced that it had taken a minority holding in a new Chicago-based minority-owned insurance broker, EBRM Risk Management & Consulting L.L.C. Aon will provide exclusive access to specialized resources and expertise to EBRM, which specializes in risk management consulting and insurance brokerage for domestic and global accounts.
Brokerage and fee revenues bounced back after a first-quarter drop, to L469.2 million ($774.1 million), an increase of less than 1% for the first six months of 1998. Converting into dollars at the prevailing exchange rates, this represents a 1.9% increase from $760 million for the first six months of 1997, and at constant exchange rates, Sedgwick estimates revenues increased 4% over the same period last year.
Investment income rose to L23.4 million from L19.6 million (to $38.6 million from $32 million). This led to corporatewide revenues rising 1.6% in the first half to L492.6 million. Converted to dollars at relevant exchange rates, Sedgwick's corporate revenues rose 2.6% to $812.6 million.
Expenses also rose, up 3% to L429 million ($707.7 million), though they are up just 2% if the effects of acquisitions are stripped out, according to Finance Director Stuart Tarrant. The second-quarter results are on track for the year's outcome, he said, predicting year-end 1998 revenue to be up 7%, with expenses up 6%.
Pretax profits were down 10.3% in the first half, to L60.1 million ($99.1 million). This included foreign exchange losses of L3.1 million and disposals of two Dutch managing general agencies that knocked L2.1 million off the half-year figures.
Exceptional items cost Sedgwick a total of L77 million in the first six months. In addition to the L80 million provision for pension reparations, Sedgwick also paid out L6.4 million in restructuring costs, particularly in its U.K. and Dutch operations, though this was tempered with a L9.4 million profit from the sale of its Dutch subsidiaries.
When exceptional items are taken into account, Sedgwick posted a pretax loss of L16.9 million ($27.9 million) for the half year, compared with a L66.5 million profit for the same period last year. After taxes, the broker had an L8 million ($13.2 million) loss, down 117.2% on its previous year's level of L46.5 million. Converted into dollars at the relevant exchange rates, this represented a fall of 117.4% from $75.9 million last year.
Sedgwick's employee benefit consulting unit, Sedgwick Noble Lowndes, posted a 2.3% increase in first-half revenues to L114.4 million.
Within the insurance and reinsurance brokerage operations, Sedgwick Ltd. -- responsible for all property/casualty business outside Asia-Pacific and the United States -- recorded revenues up 7% to L187.6 million ($309.5 million). Within Sedgwick Ltd., Corporate Risk Solutions, the marine, energy and aviation business, was down 9% to L64.2 million, a factor of the continuing soft market, said Mr. White-Cooper. International Risk Solutions saw revenues shoot up 27% to L67.2 million ($110.9 million), largely because of the joint venture with Gruppo Nikols in Italy and Dextra, a Norwegian broker. Specialist Risk Solutions posted an 11% increase to L56.2 million ($92.7 million).
North America has seen good client retention, said Mr. White-Cooper, and the operations there have "won some very big household names." Brokerage and fee revenues were fairly static at L134.3 million ($221.6 million).
Asia-Pacific revenues were up 16% at constant exchange rates, to L20.3 million ($33.5 million).
Although upstaged by the announcement of a proposed acquisition towards the end of last month, Willis Corroon's fist-half brokerage and fee revenue rose 9.5% to L339 million ($559.3 million). Investment income dropped slightly to L20.1 million, resulting in corporatewide revenues of L359.1 million, a modest rise over last year. Converted to dollars using relevant exchange rates, first-half corporate revenues rose 1.6% to $592.4 million.
Exceptional items hit Willis' profit and loss account. Along with its L25 million pension reparation provision, Willis also wrote off L30.3 million on closing Professional Liability Underwriting Managers Inc. PLUM, a Minneapolis-based professional liability wholesale operation, was closed in May, resulting in a loss of L700,000 ($1.2 million) and a goodwill write-off of L29.6 million ($48.8 million).
Operating profits, including the pension review charge, dropped 54.9% to L26.4 million ($43.6 million), in line with Willis' own expectations.
Adding PLUM's closure into the equation, Willis' pretax profits dropped to L3.9 million ($6.4 million) from L60.2 million for the same period last year.
After tax, Willis made a loss of L9.4 million ($15.5 million) for the half-year, compared with a L33.6 million profit for the year-earlier period, a 128.0% fall.
Profits before exceptional items fell 12.1% to L51.4 million ($84.8 million), though Willis' holdings in French and German ventures brought in L7.2 million ($11.9 million), compared with L2 million last year. This was largely due to Willis' one-third stakes in French broker Gras Savoye & Cie. and German broker Jaspers Wuppesahl Industrie Assekuranz.
Willis has secured its aim of becoming one of the top three brokers in key European markets with the recent acquisition of 30% of Assurandorgruppen, Denmark's largest insurance broker and employee benefit consulting firm.
Mr. Colraine now expects Willis to make "selective investments" in Latin America, a region where the company already has several operations.
He also anticipates taking the broker private will attract more people to the organization. "We attracted probably a few less this year than we had hoped," he said. Once Willis is out of the public glare, it should become easier to get the right people on board, and the effect on expenses most likely will not be seen since reporting requirements will be much less onerous for a private company.
Arthur J. Gallagher
Revenues from commissions and fees increased 8.1% during the first half for the Itasca, Ill.-based broker to $228.7 million. Corporatewide revenues, which include investment income, rose 7.9% to $241.3 million.
On the other hand, profits took a 7.7% tumble in the first half to $20.3 million. The decline is mainly attributable to $6.2 million in one-time revenue gains that occurred during the second quarter of 1997 when Gallagher sold two underperforming offices, explained Michael J. Cloherty, executive vp. "Obviously, with non-recurring gains, we were not able to duplicate that" in 1998, he said.
However, excluding the one-time gains, total operating earnings are up 28.1% for the first six months.
Mr. Cloherty said that a good portion of the broker's top-line growth is coming from its fee-based business, Gallagher Bassett Services Inc. Revenues from the claims management and risk control consulting unit rose 13.2% to $96.4 million during the first half.
Gallagher Bassett "started 1998 with the largest dollar amount of known new business ever," Mr. Cloherty said. The unit also has been "very, very successful during the first six months in putting on new business, which will aid our fee-based line during the third and fourth quarters," he said.
In addition to Gallagher Bassett, the broker is looking to its year-old Bermuda-based rent-a-captive facility, Artex Insurance Co., and its year-old wholesale broker, Risk Placement Services Inc., to contribute more in the second half of 1998.
In June, Gallagher acquired two insurance brokers: McElveen Insurance Agency Inc., a Lake Charles, La.-based commercial and personal lines property/casualty broker specializing in construction and surety bonds; and Pickard, Tate & Allen Inc., a Tulsa, Okla.-based commercial property/casualty broker specializing in pipeline construction and bonds.