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Financial results for the second quarter of 2007 were "solid" for some brokers and "not terrible" for others, according to an analyst.

Brokers, particularly those handling larger accounts, faced a tough time with decreasing rates in almost every part of the world and almost every line of business. Add to that loss of revenue from contingent commissions, which the world's four largest brokers surrendered after recent regulatory trouble.

Meyer Shields, an analyst with Stifel, Nicolaus & Co. Inc. who covers insurance brokers, said he saw "no huge surprises" in the second-quarter results, noting a "solid performance in terms of revenue growth and margin expansion" for Aon and Willis and a performance from Marsh that was "not terrible" considering its significant loss of revenue in contingent commissions.

Shields said HRH, which had a "very disappointing first quarter," and Brown & Brown seemed to get a boost in the second quarter from supplemental commissions, a substitute being suggested by some insurers to replace contingent commissions.

The loss of commissions plays a significant role in the overall financial performance of the big brokers because those revenues are very high in margin, with nowhere near the expense of ordinary revenues, he said.

Another major factor affecting financial performance was the prevalence of employees switching firms. The trend will no doubt persist for the rest of the year, he said.

"We will see a continued game of musical chairs where insurance brokers are very aggressively hiring from one another, trying to bolster their own skill sets, capabilities and geographic presences," said Shields.

Marsh bore the brunt of the negative effects of this game and probably will for the time being, he added.

"Over time, a lot of those producers that switched from Marsh to other shops are bringing parts of or entire accounts over to their new employer," said Shields.

The flipside of "musical chairs" is its effect on brokers hiring these big Marsh producers, paying them high salaries but waiting several quarters until they are productive, said Shields. He points to Willis' string of disappointing quarters in 2005, caused by the aggressive hiring of dozens of Marsh folks.

"Now over time, if these folks are any good, and most of them are, then they produce revenues that offset and then more than offset the expenses associated with hiring them," he added.

As for Brown & Brown, Shields said the Florida-focused firm is challenged in the short term by "questionable legislative activity" in the state, where its insurer of last resort, Citizens, is being allowed to compete more aggressively with the private insurance market.

"Because Brown & Brown is so heavily exposed to Florida, if they have to accept a slightly lower commission rate on Citizens business then that really interferes with their ability to generate growth," he said.

The financial future of the remaining broker firms for the rest of the year is stable.

"I think the outlook, first of all, involves continued rate decreases," said Shields. "But we are seeing some of the brokers have success in demanding higher commission rates to compensate them for the revenue they lose when rates go down, and that trend will probably continue as well."

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September 15, 2007

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