Picking Brokerage Winners

Marsh picked to do well in 2010 and beyond, Gallagher eyed for continued consistent revenue.

By DAN REYNOLDS, senior editor of Risk & Insurance®

New York-based financial services analysts Keefe, Bruyette & Woods forecast a mixed fourth quarter for publicly traded insurance brokerage companies and a quiet year for brokerage mergers-and-acquisitions activity.

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Among the larger brokerages, the analysts singled out Marsh & McClennan Cos. Inc., the parent company of brokerage Marsh, as their favorite because, they believe, the brokerage could be in the beginning stages of an acquisition strategy. The analysts expect Marsh to continue, however, to trail some of its rivals in its ability to boost operating margin.

Improved operating margin has been on the minds of Marsh executives for the past couple of years, and data from KBW illuminates Marsh's struggles in that realm.

KBW analysts project an operating margin of 18.2 percent for Marsh in the fourth quarter. That's a few ticks behind the 20.3 percent they project for rival Itasca, Ill.-based Arthur J. Gallagher & Co. and the 21.3 percent for Chicago-based Aon Corp. Dublin-based Willis Group Holdings trails the field in that respect with a 17.2 percent operating margin forecasted for the fourth quarter.

For 2010 and 2011 full-year earnings, KBW analysts expect, Marsh could continue to struggle to best its rivals in operating margin. The analysts expect that Marsh will register operating margins of 19.9 percent in 2010 and 20.3 percent in 2011. That's compared with projections of 23.4 percent and 23.9 percent for Gallagher and margins of between 21 percent and 22 percent for both Aon and Willis.

REVENUE CONSISTENCY

Of the larger brokerages, the only one that KBW analysts feel will deliver consistent revenue growth over the next couple of years is Gallagher. The analysts see Gallagher increasing revenue by more than 5 percent in 2010 and by more than 6 percent in 2011.

It's likely, given the desultory state of the economy, that Gallagher will see revenue growth in those years due to the high number of acquisitions it made in the past couple of years.

According to the company's filings with the Securities and Exchange Commission and its press releases, Gallagher racked up 34 acquisitions in 2008, a 61.9 percent increase over its then-record 2007 acquisitions figure of 21.

But like property/casualty insurance carriers, brokers in general are flying against enormous headwinds. Any company looking for top-line growth is going to have to bide its time, because the recovery from the 2008-2009 recession is looking more and more like a slow and steady one that continues to be hamstrung by high unemployment.

December unemployment numbers rose in key states like Florida, New York and California. California alone shed more than half a million jobs in 2009, and the national unemployment rate remains above 10 percent.

"Top-line pressures continue to hurt the group, but operating margins should see modest expansion resulting from cost-cutting measures and restructuring plans enacted over the past year," the KBW analysts wrote.

January 22, 2010

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