By MATTHEW BRODSKY, senior editor/Web editor of Risk & Insurance®
In the fourth quarter of 2010, Itasca, Ill.-based Arthur J. Gallagher & Co. continued its trend of negative organic growth, while Aon Corp. marched in the opposite direction.
AJG reported $1.174 billion in organic commissions and fees in 2010 for its brokerage unit, down from $1.197 billion, a 1.9 percent drop. Its risk management segment reported 2010 year-end organic fee revenue of $446.9 million, down from $459.1 million, a change of 2.7 percent.
As Douglas K. Howell, vice president and chief financial officer at AJG, mentioned during the earnings call last week, the firm has had three straight years of negative organic growth--about $60 million in "erosion" over those three years according to his estimates. Commissions are helping the brokerage operation replace revenue lost from organic growth.
"Picking up $70 million of supplementals and contingents probably replaces most of that negative organic growth in that case. So that explains the top line," Howell said.
Aon's brokerage operation, on the other hand, in the form of its Risk Solutions segment, posted a 3 percent fourth-quarter increase, its highest rate of quarterly organic revenue in the past three years. Retail growth, which posted a 4 percent quarterly increase, came in part thanks to a 93 percent client retention rate and $250 million in new business, CEO Gregory Case said.
"We're literally at a place where we've got a new business number that is literally almost at the top of anything we've ever done," Case told the audience of Aon's earnings call.
MERGERS & ACQUISITONS
Aon's Risk Solutions unit saw fourth quarter revenue increase to $1.8 billion, from $1.7 billion in the prior-year quarter, with a 3 percent increase in organic growth in commissions and a 2 percent increase from acquisitions. Revenue for the overall Aon operations was $2.909 billion for the fourth quarter, up from $2.073 billion for the quarter in 2009.
About $90 million out of $446.7 million of AJG's total revenue in the fourth quarter came from seven acquisitions, $40 million in the brokerage segment and $50 million in the risk management segment.
Yes, acquisitions. That's a big topic for both of these large brokers. For Aon, it was just finishing digesting Benfield's reinsurance intermediary operations when it then closed last October on its $4.9 billion purchase of Hewitt Associates. In part thanks to this acquisition, the revenue from its human resource consulting group tripled to $1.2 billion.
Aon's near-future M&A activity could be tamer as it works to integrate Hewitt.
"Obviously, the investment and the partnership with Hewitt is absolutely our focal point. That's really where we're going to focus just as we did with Aon Benfield," Case said during the call. "It won't be a high focus for 2011," he added about M&A.
Those "incremental places," according to Case, could be opportunities in emerging markets.
As for Arthur J. Gallagher, don't expect a buying slowdown.
"Well, first and foremost we have a great acquisition pipeline right now, and I think that we'll have plenty of opportunities to use cash in acquisition," CFO Howell said. AJG has $125 million in new borrowings and $100 million in cash to spend.
"I believe that our activity will be very, very solid. The pipeline has literally never been better. If you took a look at our pipeline, it's dozens and dozens of people that we're talking to, some very, very nice firms," agreed chairman, president and CEO J. Patrick Gallagher Jr.
Of course, organic growth would be nice too, when the economy ever turns around and rates in the insurance market harden.
"If the company could return to something on the order of 3 percent to 5 percent organic growth, that would be very beneficial to earnings," Gallagher told the earnings call audience.
February 8, 2011
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