By KATIE KUEHNER-HEBERT, a freelance writer based in San Diego with more than two decades of journalism experience and expertise in financial writing
First-quarter results at most of the country's top insurance brokerage firms were either in line or fell short of Wall Street's expectations, as organic growth continued but margins were weaker than anticipated.
"Organic growth is generally getting better because the economy is picking up," Adam Klauber, an analyst at William Blair & Co. LLC, said in an interview. "But margins were flatter during the quarter after expanding over the last year and a half because companies got aggressive at cutting costs. The question mark going forward is whether individual companies in the sector will be able to push margins after several years of margin expansion."
First-quarter net income at New York-based Marsh & McLennan Cos. Inc. rose 31 percent from a year earlier, to $325 million, or 57 cents a share. The firm's adjusted net income was 56 cents a share, in line with the mean analyst estimate. Overall revenues rose 5 percent on organic growth, while adjusted margins fell 20 basis points to 15.4 percent due to higher pension expenses and the effects of foreign exchange.
FBR Capital Markets analyst Bijan Moazami wrote in a research note that Marsh's Risk and Insurance Services operation in particular has been generating "solid, mid-single-digit organic revenue growth across all business lines and geographies" for the past several quarters.
"In terms of growth by geography, there has been particular strength in Asia-Pacific and Latin America, which experienced 9 percent and 21 percent organic growth, respectively," Moazami wrote. "At the minimum, we expect the overall level of growth to continue, with upside to the extent that the global economy recovers further."
Mark Dwelle, an analyst at RBC Capital Markets LLC, wrote in a note that he expects another acquisitive year for Marsh.
Marsh was "continuing the build-out of its Marsh Agency platform" with four deals ($34 million in annualized revenues) that it announced during the March quarter, Dwelle wrote.
"With signs that the M&A environment is improving and recent deal integration is proceeding well, we expect a solid M&A pace for Marsh this year," the analyst continued.
Aon Corp.'s net income rose 38.2 percent, to $246 million, or 71 cents a share. The Chicago-based firm's adjusted earnings of 80 cents a share was in line with analysts' expectations, as margins fell 150 basis points to 19 percent due to a lease termination charge and currency translation headwinds.
"Insurance brokerage's organic revenue growth was a meager 2 percent, while HR Solution did not have any organic revenue expansion at all," Moazami wrote, adding however:
"We are generally positive about the outlook for insurance brokerage and consulting, making us naturally positive on Aon. The brokerage business is predictable and derived from fees and commissions that require limited capital. In addition, there is material organic growth potential for larger brokers in emerging markets."
For the quarter net income at Willis Group Holdings fell 83 percent, to $34 million, or 20 cents a share, due mainly to a $97 million charge related to the 2011 operational review and $171 million make-whole amounts related to the repurchase and redemption of senior notes and write-off of unamortized debt issuance costs. Excluding these items, adjusted net income was $1.28 a share, compared with $1.27 a year earlier and 6 cents over the mean analyst estimate. Total revenues rose 4 percent, to $1.008 billion.
"Willis' exposure to emerging markets' rapidly growing premium volumes, its foray into capital markets and its well-entrenched sales culture should continue to produce above-average revenue growth," Meyer Shields, an analyst at Stifel Nicolaus & Co. Inc., wrote in a note. "Our consolidated organic growth projections are 4 percent and 6 percent for 2011, and 2012, respectively."
The U.K.-based broker's margins should improve due to an initiative called "The Willis Cause," according to David West, an analyst at Davenport & Co. LLC. The Willis Cause is an attempt to differentiate itself in the insurance broker sector, by pursuing all available avenues to deliver the best price, terms and conditions to clients; improve client service and efficiency globally; and pay claims quickly. West estimates benefits of the initiative to be in the $65 million to $75 million range for this year, achieving annual savings of $95 million to $105 million in 2012.
Net income at Arthur J. Gallagher & Co. in Itasca, Ill., fell 48 percent, to $15.2 million, or 14 cents a share, due to higher corporate segment losses and compensation costs. Analysts on average had expected the company to earn 23 cents a share.
Still, RBC's Dwelle wrote, AJG's higher-than-expected revenues reflect good organic growth.
"Visibility toward improved top-line growth continues to improve as the economy strengthens and insurance prices begin to stabilize," Dwelle wrote. "We're increasingly optimistic about organic growth and the potential for margin leverage as a result."
May 12, 2011
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