By CYRIL TUOHY, managing editor of Risk & Insurance®
For insurance brokers, healthcare reform signed into law by President Obama in March 2010 offered an unparalleled opportunity to beef up their benefits offerings.
As a result, it's no mistake that in the past 18 months Aon Corp., Arthur J. Gallagher & Co., and Marsh & McLennan Cos. Inc. have all been on a shopping spree buying employee-benefits consultancies and smaller agencies with expertise serving middle-market and small companies.
Now, with the books closed on third-quarter earnings, it's time to dig into just how lucrative the employee benefits space is likely to become for the insurance brokerages.
Take Aon's $4.9 billion purchase last year of Lincolnshire, Ill.-based "human capital consultancy," Hewitt Associates.
The bellwether deal of 2010 ushered in some consolidations among benefits shops as brokers chased new growth selling benefits-related consulting services and benefits administration outsourcing.
To be sure, the Hewitt acquisition is costing Aon a bundle in integration and severance costs in the short term. The signs of future growth around human resources and consulting, however, are unmistakable.
Aon's third-quarter income from continuing operations in its "HR solutions" segment increased 43 percent to $77 million over the year-ago period, Aon reported.
Mercer, the benefits-consulting arm of Marsh & McLennan, and Oliver Wyman, Marsh & McLennan's organizational transformation, leadership development, and analytics shop, also delivered good numbers.
"Mercer has big potential due to health and benefits," Marsh & McLennan's President and CEO Brian Duperreault said in a recent conference call with analysts.
Clients are going to need advice and solutions in the areas of healthcare legislation and delivery, and in the area of retirement planning, Duperreault told analysts.
Mercer and Oliver Wyman reported third-quarter adjusted operating income of $168 million, up more than 16 percent over the year-ago period.
Mercer reported third-quarter revenue of $975 million, an increase of 11 percent over the year-ago period, and Oliver Wyman reported revenue of $364 million, an increase of 13 percent over the year-ago period.
Organic revenue growth for the units increased 4 percent and 9 percent, respectively.
Breaking down Mercer's revenue lines even further, the retirement line reported third-quarter revenue of $261 million, an increase of 2 percent over the year-ago period.
The health and benefits line reported $239 million in the period, a 7 percent increase over the year-ago period. The line posted 7 percent organic revenue growth.
A third line, "Rewards, Talent & Communications," reported revenues of $173 million, an increase of 21 percent over the year-ago period. Organic revenue growth for the line increased 13 percent, the company reported.
Marsh & McLennan, through its subsidiary Marsh & McLennan Agency LLC., is specifically targeting insurance agencies. On Nov. 4, Marsh & McLennan Agency LLC announced the purchase of the employee benefits division of Kaeding, Ernst & Co., a Marlborough, Mass.-based employee benefits, life insurance, and financial planning consulting firm.
The addition "is part of Marsh & McLennan Agency's strategy to build a pre-eminent property, casualty and employee benefits organization" serving the middle market, David Eslick, chairman and CEO of Marsh & McLennan Agency, said in a statement.
On Nov. 17, Marsh & McLennan Agency announced the purchase of Seitlin Insurance, one of the largest insurance and benefits agencies in South Florida. The Seitlin purchase was the third for Marsh & McLennan Agency this month.
J. Patrick Gallagher Jr., chairman, president and CEO of Itasca, Ill.-based Arthur J. Gallagher & Co., said in a conference call with analysts last month that he's seen more customers "expecting industry specific expertise and technical expertise in assembling their insurance and benefits programs."
Gallagher & Co., the nation's fourth largest broker, reported third-quarter net income of $49.2 million, an increase of 14 percent over the year-ago period.
In the brokerage segment, the company reported third-quarter earnings from continuing operations before interest, income taxes, depreciation, amortization and the change in estimated acquisition earnout payables of $45.9 million, up 16.7 percent from $39.3 million in the year-ago period.
In the risk management segment, third quarter earnings from continuing operations before interest, taxes, depreciation, amortization, and the change in estimated acquisition earnout payables was $11.4 million, up more than 40 percent from $8.1 million in the year-ago period, the company also reported.
Gallagher, whose brokerage company has announced 21 mergers in 2011 as of Oct. 26, and has a strong base among middle market clients, said the nation's new healthcare law is "just too complex and technical" for many smaller firms to handle.
That's why there's an opportunity for insurance brokers to beef up their employee benefits and human capital expertise to bring new tools and talent to help companies with their healthcare needs.
Companies have struggled to keep healthcare cost increases in check for more than a decade, and 2012 is expected to deliver more healthcare cost increases.
Earlier this year, Aon Hewitt projected U.S. healthcare costs in 2012 would surpass $10,000 per employee for the first time.
November 21, 2011
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