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By CYRIL TUOHY, managing editor of Risk and Insurance®

Guy Carpenter & Co., which announced last week that it would buy the London-based reinsurance broker Rattner Mackenzie Ltd., is doing its part to help its parent company Marsh & McLennan Cos. (MMC) redistribute its earnings mix.

Not only is the purchase a "positive step forward" for Guy Carpenter, said Peter Zaffino, president and CEO of Guy Carpenter, in a statement. It is also an economic step forward for MMC, Guy Carpenter's ultimate parent.

MMC, according to a report by Bernstein Research published last spring, is in a race to lower its cost structure against large but seemingly more nimble competitors: Chicago-based Aon Corp. and the London-headquartered Willis Group Holdings.

With more than 50 percent of revenues coming from its consulting operations, MMC's growth prospects and profit margins are more vulnerable to a weak economy than Aon and Willis, according to the analysis by Bernstein.

Over the two-year period from 2007 to 2009, for example, reinsurance made up an estimated 7 percent of MMC's business mix, according to Bernstein Research. That compares with 21 percent for Aon and 15 percent for Willis North America.

MMC's choices in altering its mix had to come from either cutting staff, which MMC did earlier this year; or acquiring other reinsurance brokers, which it also did in March with the purchase of John B. Collins Associates Inc.

"Expense cutting seems unavoidable, whether in conjunction with an acquisition or by itself (the former my be more palatable)," wrote Bernstein Senior Vice President Todd R. Bault, co-author of the report issued last May, titled "Non-Life Insurance Brokers: Inverting the Controversy: Why Buy Brokers Over Insurers?"

WHY RATTNER?

The Rattner deal gives Guy Carpenter access to reinsurance coverage underwritten by Houston-based HCC Insurance Holdings Inc., but Rattner is still too small a reinsurance brokerage shop to help Guy Carpenter leap past Aon Benfield, the world's No. 1 reinsurance broker.

David Bradford, executive vice president of Advisen Ltd., told Risk & Insurance® that the Rattner acquisition doesn't appear to represent a major move by Guy Carpenter.

"I'm not sure of the strategic significance of Rattner Mackenzie, other than the big chunks of premiums HCC had," said Bradford.

The Rattner purchase is Guy Carpenter's second acquisition this year. In March, Guy Carpenter bought Collins. The deal came on the heels of Aon's announcement in the summer of 2008 that it would purchase Benfield, a reinsurance broker with a strong background in analytics.

Bradford also said the Rattner purchase is the latest in a trend of acquisitions taking place against the backdrop of a soft market and declining premium volume. The largest reinsurance brokers are shedding a vertically based integration model in a post-Spitzer world in favor of more breadth across a range of industries.

In doing so, the major reinsurance brokers--with acquisition war chests in the hundreds of millions of dollars--are reaching out to midsize companies and finding themselves competing for clients against midsize reinsurance brokers.

"The market has really consolidated at this time because of volume and prices, but this was going on beyond that point--the steady process of rolling up all the independents," said Bradford.

October 13, 2009

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