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A.M. Best Company, Inc. - BestWire
January 06, 2004
HARRISBURG, PA (BestWire) - Organic growth is slowing for many of the world's top insurance brokers, a trend that will likely lead to greater consolidation in the market as brokers look to acquisitions to fuel earnings, a study found.
In its "Broker Insights Quarterly" report for the third quarter of 2003, insurance industry consultant WFG Capital Advisors noted that eight of the leading insurance brokers together registered a 10.3% increase in revenue from organic sources--excluding acquisitions and exchange-rate fluctuations. In the third quarter a year earlier, organic growth was 12.4% over the prior year.
"The most notable item contained in the report is the apparent decline of organic growth among the leading brokers," WFG principal Steven Wevodau said in a statement. "The composite total revenue growth of the tracked firms totaled 17.5% for the year, well within analysts' expectations. But if you peel back the onion, the disconcerting issues are twofold--the segment as a whole is seeing reduced organic growth. And greater dependency on acquisitions, and certain leading brokers within our research are so leveraged on acquisition growth, it should be cause for some level of concern."
Organic growth represented 77.8% of the overall growth in revenue for the eight brokers combined, compared with 70.8% a year earlier--but overall growth fell to 13.3% from 17.5%. "While these are not ground-breaking shifts, it may be an indication that the segment is beginning to struggle to meet growth hurdles," said WFG in its report. Harrisburg, Pa.-based WFG added that "certain companies within the segment appear to be too highly leveraged upon acquisitions to sustain needed top-line growth expected by investors."
Among the eight brokers in the study, WFG found that Willis Group Holdings Ltd. (NYSE:WSH), Marsh & McLennan Cos. (NYSE:MMC) and Arthur J. Gallagher Co. (NYSE:AJG) "sustained strong organic growth rates, which should indicate to investors that they have a strong sales and service model equipped to contend with the competitive landscape."
Those three companies were far ahead of the rest in terms of how much of their growth is organic, the report noted. Willis' revenue grew 17% in the third quarter--94.2% of that coming from organic growth. For Gallagher, 89.2% of its 13.3% growth was organic, and for Marsh, 89% of its 14.6% growth came from within. The fourth-highest performer was Aon Corp. (NYSE:AOC), which derived 70% of its 10% growth in third-quarter revenue from organic growth.
At the other end of the spectrum, Brown & Brown Inc. (NYSE:BRO) only derived 15.1% of its 22.6% growth in revenue from organic sources. USI Holdings Corp. (NASDAQ:USIH) derived 34.1% of its growth from organic sources; for Hub International Ltd. (NYSE:HBG), organic growth accounted for 35.7% of total growth; and Hilb Rogal & Hobbs Co. (NYSE:HRH) achieved 41.9% of its third-quarter growth organically.
"Brown & Brown, Hilb Rogal and USI Holdings give cause for some moderate concern with organic rates that are below composite," said WFG in its report. "The leverage of continued acquisitions should alert us to their abilities to sustain market shifts in rates."
While acquisitions are a legitimate source of growth for brokers, "there should be parity between acquired and organic growth," WFG said.
Among the most recent broker acquisitions, Willis acquired Alabama-based Vision Insurance Group (BestWire, Jan 5, 2004). In recent months, Willis also acquired St. Paul, Minn.-based River City Agency LLC, a 7-year-old brokerage specializing in serving the local construction industry throughout the upper Midwest. Willis also acquired San Diego-based Cogdill Bonding & Insurance Services Inc., TCT Insurance Services and the assets of certified financial planner Scott J. Tucker, all three of which were merged into Willis' existing San Diego operation.
Reinsurance broker Benfield Group Ltd. (LSE:BFD) said it has become the majority stakeholder in International Space Brokers Inc. through the acquisition of 43% of the share capital of ISB by Benfield subsidiary Crawley Warren (USA) Inc. (BestWire, Jan. 5, 2004). Benfield now holds 86% of the share capital of ISB, a specialty space insurance broker with offices in London and Washington, D.C. Benfield said Crawley Warren obtained the 43% stake from Frank Crystal & Co., a New York-based specialty insurance broker.
Arthur J. Gallagher expanded its U.K. and Ireland presence with the acquisition of Connor Hale Kerslake Ltd. for undisclosed terms (BestWire, Dec. 31, 2003). In late December, Gallagher announced the acquisition of the remaining 50% of an Australian claims management and risk control joint venture from its partner, giving the company full ownership of the entity. Gallagher subsidiary Gallagher Bassett Services Inc. acquired the rest of Wyatt Gallagher Bassett Pty Ltd. from McGill Holdings Pty Ltd. for an undisclosed amount. Gallagher formed the joint venture with Wyatt Group in 1997, with a network of small offices and 90 employees throughout Australia (BestWire, Dec. 29, 2003). Including the United Kingdom and Australia, Arthur J. Gallagher made 15 acquisitions in 2003.
Brown & Brown, which made 16 acquisitions in 2003, already has two more registered in the new year (BestWire, Jan. 5, 2004). The group said it acquired the assets of Niagara Risk Management Associates Inc. and Niagara Benefits Group Inc., which both do business as Niagara Insurance Group, based in Williamsville, N.Y.
Brown & Brown said that it also acquired the assets of Eugene W. Pashley Agency Inc. in New Jersey. The agency has annualized revenue of about $2 million and offers commercial property and casualty products for residents and businesses across New Jersey, with a focus on the southern New Jersey shore area.
(By David Pilla, senior associate editor, BestWeek: David.Pilla@ambest.com)
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