By Katie Kuehner-Hebert
The country's top insurance brokerage firms beat Wall Street's expectations for the second quarter on top line revenue growth due to sales abroad but margins remained flat.
"Organic growth continues to pick up, with particularly strong international growth," Adam Klauber, an analyst at William Blair & Co. LLC, said in an interview Aug. 3. "We're seeing strong contributions from emerging markets in developing countries, particularly Latin America, which is growing 20 percent on average and Asia, which is more in the high single digits."
However, brokerage firms' margins on average were flat, Klauber said. As a result, "earnings growth has mainly been through top line revenue growth."
Marsh & McLennan Companies Inc.'s first quarter net income from continuing operations was $286 million, or 50 cents a share, two cents higher than the average analyst estimate. A year earlier, Marsh's operating loss was $29 million.
Total revenues grew 12 percent to $2.93 billion, outpacing the $2.80 billion forecast of Mark Dwelle, an analyst at RBC Capital Markets LLC.
"Despite some recent macro concerns, we feel confident that the top-line growth trends in brokerage and consulting will continue to outpace peers during" the second half of 2001, Dwelle wrote in an Aug. 3 note. "Likewise, we think that there are additional margin expansion opportunities ahead on favorable sales trends and good cost management."
Aon Corp.'s net income rose to $258 million, or 75 cents a share, from $153 million, or 54 cents a share, in the same period last year. Earnings per share from continuing operations rose 2 percent to 83 cents a share, beating consensus estimate by a penny.
"Risk Solutions' organic growth should improve as employment and the
overall economy recover, with negative insurance pricing impact fading
over" the second half of 2001, Meyer Shields, an analyst at Stifel, Nicolaus & Company Inc., wrote in a July 29 note. "Reinsurance still faces some headwinds from higher cedent retentions and soft pricing, and 1/1 renewals' prominence delay most of the pricing response of Asia-Pacific catastrophes and RMS 11 until 2012. We project 2.2 percent organic growth in 2011, 4.2 percent growth in 2012, with pretax margins of 20.1 percent and 22.3 percent, respectively."
Dwelle said in a July 29 note that it was a mixed quarter for Aon as a good top line growth within Risk Solutions was overshadowed by margin weakness across both segments.
"Until the margin picture improves or signs emerge that organic growth is set to accelerate across both segments, we remain on the sidelines," he wrote.
Willis Group Holdings' adjusted net income excluding special items was $108 million, or 61 cents a share, three cents above consensus estimate and seven cents above the second quarter of 2010.
"Willis' exposure to emerging markets' rapidly growing premium volumes, its foray into capital markets, and its well-entrenched sales culture should produce above-average revenue growth especially if rates start to rise in 2012," Shields wrote in a Aug. 4 note. "Our consolidated organic growth projections are 3 percent and 6 percent for 2011 and 2012, respectively.
Although the business review relieves some of the 2011 margin pressure, Willis' track record of postponing "breakout" margin expansion will probably leave investors on the sidelines until actual evidence of rapid margin expansion emerges, Shields added.
Arthur J. Gallagher & Co.'s net income for continuing operations was $546.1 million, or 37 cents, beating consensus estimate by 11 cents. A year earlier, that figure was $ 459.5 million, or 42 cents a share.
"Rapidly shrinking reserve releases?are eroding underwriting profits," Shields wrote. "The industry's quickly deteriorating underwriting profitability should continue to bolster price discipline, which in turn should expand AJG's revenues and margins."
"Despite strong sales in the quarter, the operating margin leverage was below our expectation due to deal dilution and some higher incremental costs," Dwelle wrote in a July 27 note. "While we are becoming more constructive on the insurance brokerage space, we remain on the sidelines until margin expansion returns and recent larger-scale acquisitions are fully integrated."
August 8, 2011
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