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The largest publicly traded insurance brokers posted modest organic growth in 2014 as a slowly improving U.S. economy helped offset ongoing soft insurance rates amid an active year for mergers and acquisitions.
Marsh & McLennan Cos. Inc., Aon P.L.C., Arthur J. Gallagher & Co., Willis Group Holdings P.L.C. and Brown & Brown Inc. increased their 2014 revenue, with Gallagher seeing the largest percentage rise and Aon the smallest.
Gallagher, through a series of acquisitions, also became the world's third-largest broker, surpassing Willis.
Profitability varied, however.
Marsh & McLennan, Aon and Gallagher increased their profit in 2014 with respective organic growth rates of 5.0%, 6.0% and 5.6%. Willis and Brown & Brown, while still profitable, turned in year-end 2014 figures that were less than 2013 and respective organic growth rates of 3.6% and 3.3%.
Overall, analysts said, the results were positive.
“On average, brokers have been profitable, consistently generating double-digit consolidated pretax operating margins,” said Gretchen Roetzer, Chicago-based director at Fitch Ratings Inc.
“The brokers continued to generate healthy organic growth through the past year, helped by an improving economy in the U.S. and by greater penetration in some international markets,” said Bruce Ballentine, vice president and senior credit officer at Moody's Investors Service Inc. in New York. “Economic growth is an important driver of insurance premiums, which in turn drive broker commissions and fees.”
Organic growth is “reflective of the economy, in part,” said Tim Cunningham, managing director at Chicago-based investment banking and consulting firm Optis Partners L.L.C. “We've seen some modest improvement quarter over quarter, and broker revenue moves a little bit in lockstep with the economy.”
“On the retail brokerage side, it seems like organic growth is kind of slipping a bit, and I think it's kind of reflective of the market, which appears to be getting mildly soft,” said Mr. Cunningham. “That impacts rates, it impacts revenues and therefore it impacts earnings.”
“In terms of insured exposures, that's been modestly up, which has helped to offset somewhat the deceleration of pricing,” said Julie Herman, New York-based associate director of insurance rating at Standard & Poor's Corp. That pricing deceleration has extended from property to casualty insurance and reinsurance, she said.
One positive aspect for brokers last year was modest but growing revenue related to private health insurance exchanges and advisory services, which Moody's Mr. Ballentine said “have growth potential.”
All of the top five brokers operate private exchanges.
“The evolving health care environment could still provide opportunities for employee benefits and consulting,” said Fitch's Ms. Roetzer.
“Employee benefits is generating some traction,” said S&P's Ms. Herman, although she also said “overall adoption in the private exchange markets may be a little slower than anticipated and is at this point still a modest source of revenue growth.”
Growth by acquisition continues to be a major theme in the industry, rising to a record 321 M&As in 2014, according to Optis Partners.
“I think you're going to see three to five years of pretty robust deal activity,” said Mr. Cunningham.
“In 2015, Fitch expects brokers to continue to supplement organic revenue growth through selective acquisitions,” said Ms. Roetzer.
“A core skill for all the leading brokers is to source, close and integrate acquisitions,” said Mr. Ballentine. “To be one of the biggest brokers, you've probably gotten there through a combination of organic growth and acquisitions, and to remain among the leaders you need to keep doing both.”
National Indemnity Co. drove a 78.4% increase in net written premiums among 18 U.S. reinsurers in 2014.