RETAIL THERAPY FOR BROKERS
Reactions Magazine
May 2004
Organic growth for publicly-traded US insurance brokers is shrinking. Many are going shopping for acquisitions to compensate.
Growth by acquisitions took on added importance during 2003 for many of the industry’s leading brokers. WFG Capital Advisors has noted a strong trend among the US publicly-traded insurance brokers in which organic growth for the year has steadily declined.
The study supported the view that leading insurance firms are more dependent than ever on acquisitions to sustain prospective revenue growth. This is a troubling sign that the leading industry brokers’ overall growth is slowing. It implies that many companies will have to rely more heavily on purchased revenues to support shareholder demands and expectations.
The leading industry segment posted overall composite revenue growth of 13.4% for the fourth quarter of 2003, which generally remained in line with analysts’ expectations. However, less than two-thirds of the revenue growth was organic. According to the research, the leading group of brokers relied on artificial means for more than one-third of its revenue growth for the quarter.
Brown & Brown, USI Holdings, Hilb Rogal & Hobbs (HRH), and Aon all reported organic growth rates for the quarter that fell below the industry median and composite benchmarks for various reasons outlined in the study. Willis Group Holdings, with its large international operations, continued to outperform the industry segment. It posted the highest level of overall organic growth for the quarter at 11%. Hub International, Marsh & McLennan, and Arthur J. Gallagher also posted results that were in line or above median and composite results for the quarter.
More to come
The downward trend in organic growth rates is expected to continue throughout 2004. This is a strong indication that the broker market has been directly affected by rate stabilisation and will not maintain growth expectations without relying more heavily on acquisitions. As product rates continue to stabilise and even soften, greater emphasis will be placed on growth by acquisition as a means to contend with static organic revenues.
Brown & Brown and HRH have struggled to balance acquired and organic growth for 2003, indicating disproportionately low levels of overall pure growth. Both organisations depend heavily on acquiring companies to grow. Speculation remains that neither firm is well positioned to sustain prospective growth expectations without a heavy deployment of capital to support acquired growth.
Only Hub, Marsh, and Willis exceeded the composite organic growth rate for the fourth quarter and only these three consistently exceeded the composite rate during 2003. Aon, Brown & Brown, and USI, on the other hand, never exceeded the composite organic growth rate during 2003.
The leading insurance brokers reported composite revenue growth of 16.3%, or approximately $2.4bn. While at first glance this appears impressive, only 69% of the growth was organic, or from sources that existed at the beginning of the year.
Willis, HRH, Brown & Brown, and Hub were top performers, reporting overall revenue growth rates above the median and composite levels. However, a closer analysis of two of the highest-growing firms indicates some troubling results. Brown & Brown, which posted an overall revenue increase of 22.9%, only sustained 5.9% organic growth, while HRH managed only 5.5% organic growth despite an overall reported revenue increase of 24.4%. Both firms clearly have begun to rely heavily on acquisitions to support growth.
Given that composite commercial rate increases are expected to be in single digits for 2004, many industry leaders are focusing on cost containment and integration strategies, as well as aggressive campaigns to promote and increase sales. These practices will serve to supplement increased acquisition campaigns to foster expected revenue growth.
Many of the leading brokers have not provided any form of explicit earnings guidance for 2004. This implies that management is uncertain about the overall impact of all of these events on their individual performance during the upcoming year. Industry professionals should continue to monitor results closely during the first half of the year, because many firms will continue to struggle to achieve strong organic results.
Taking on the banks
Looking at full-year results, banks’ revenue growth from insurance brokerage outstripped that of the brokers themselves. According to September 30 2003 year-to-date results, brokers were outperforming a selected group of large banking institutions in insurance distribution revenue growth. However, December 31 2003 year-to-date results indicate a shift in favour of banks, which for the year, are growing at a slightly higher level than the leading brokers.
Highly acquisitive banks, just like their brokerage counterparts, are sustaining revenue growth artificially by purchasing agencies. This determination is made based on disclosed sizes of acquired business because banks to not disclose overall organic growth.
For all of 2003, the leading group of banks produced overall revenue growth of 17.5%.UnionBanCal led all its peers, posting revenue growth of 125%. This consisted mostly of acquired revenues. Results from the banks with more established brokerage arms – including Wells Fargo and Commerce Bancorp – mirrored growth rates of the career brokerage segment.
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