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By DAN REYNOLDS, senior editor of Risk & Insurance®

Because they touch so much of the global economy, straddling so many different industries, results from insurers and their brokers may be one of the best indicators of the economy's overall health or illness.

Overall, brokers are cutting costs and counting on international growth to offset the revenue losses they are seeing in the United Kingdom, the United States and Canada, with the hopes that things will eventually get better.

In his conference call with analysts on Oct. 28, J. Patrick Gallagher, the chairman and CEO of Itasca, Ill.-based Arthur J. Gallagher & Co., said his conversations with clients indicate that things are not good and they are not going to get better anytime soon.

"To say that it is extremely tough out there would be an unbelievable understatement," Gallagher said. "Rates are continuing to drop, and the economy has taken a huge toll on our clients."

Although the stock market has made some tepid recoveries, U.S. unemployment is still very high, cresting above 10 percent in October, and orders are way, way down, to hear Gallagher tell it.

In response to a question from Mark Hughes, an analyst with Sun Trust, as to the health of Gallagher's middle-market customers, this is what Gallagher had to say:

"Mark, really, I meet a lot with clients, and they laugh at the green-shoot discussions," said Gallagher, referring to the popular phrase "green shoots" used by some to describe the nascent economic recovery.

"Some of the transportation clients think that maybe in the first quarter they are going to see some increase, but by and large our clients are really suffering," Gallagher said.

He mentioned, as an example, electrical contractors who are being devastated by the downturn in commercial construction.

"We've got customers that did six, seven, 10 million dollars in revenue a year ago that are going to do 2 (million) this year," Gallagher said.

"Their businesses aren't down on the order of 3, 4 or 5 percent, these businesses are down 50, 60 percent," he said.

In reaction to those harsh economic realities, Gallagher plans to lay off about 400 employees in the coming year.

For now, the company is reporting strong results. Gallagher had net income of $41.6 million in the third quarter, an increase of 10.2 percent over the third quarter of 2008. Risk management and brokerage revenue was at around negative 2.7 organically for the quarter, Gallagher said.

For the year to date, Gallagher reported nine-month net income of $111.8 million, an increase of 53 percent over the $72.6 million in net income it reported for the first nine months of 2008.

MARSH LOOKING OVERSEAS

Elsewhere, major brokers were calling attention to their efforts at cost-cutting, their growth in some international segments, and the dual effects of a weakened economy and falling insurance prices.

Dan Glaser, CEO of New York-based brokerage Marsh, told analysts on Nov. 4 that China and Taiwan, the Middle East, Argentina, Brazil and India all produced double-digit growth for the broker in the third quarter of 2009.

"So on the ground, where there is growth around the world, we are capturing it," Glaser said. "And so I do think we are well-positioned."

Marsh's revenue in the third quarter was $989 million, a decline of 2 percent excluding the impact of foreign currency exchange rates. U.S. and Canada results were worse, with revenue down 4 percent excluding foreign exchange.

Adjusted operating margin, a key focal point for Glaser and his boss, Marsh & McLennan Co. CEO Brian Duperreault, was 12.9 percent for MMC's risk and insurance segment in the three months ending on Sept. 30. That's a substantial improvement from the 5.4 percent adjusted operating margin the risk and insurance segment reported for the first three months of 2008.

Adjusted operating income for risk and insurance was $158 million for those three months, an increase of 128 percent over the adjusted operating income of $69 million for the first three months of 2008.

AON ON OVERHANG

Marsh's fiercest competitor, Chicago-based Aon Corp., reported a 3 percent organic revenue decline in the third quarter of 2009. Organic growth was down 13 percent in Europe, the Middle East and Africa, and it was down 8 percent in the United Kingdom.

Aon's net income was up 3 percent for the quarter, at $120 million versus last year's $117 million.

Like Patrick Gallagher, Aon CEO Greg Case, when asked by UBS' Brian Meredith for an economic forecast, said there are still a lot of dark clouds out there. Improvements, he said, have been slight.

China, Japan and Singapore have shown some sings of new life, he said. He also said Brazil is showing some promise as the insurance market there is opened up to more competition after years of government control.

"But there is still a lot of overhang, particularly in Europe, when you look at the overall economies of Europe and the pressure that they are under right now and in the United Kingdom. So, really not trying to hedge, we are preparing for a tough economic environment, a tough set of headwinds in 2010, through which, by the way, we still have to deliver," Case said.

November 6, 2009

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