Brokers Earnings Predicted To Fall In ?04

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By Mark E. Ruquet

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NU Online News Service, July 9, 2:31 p.m. EDT -An analyst's report predicts that as insurance companies becomemore profitable, premium increases will begin to moderate, leadingto a decline in revenue and income for insurance brokers.

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A report by Chicago-based investment banking firm Cochran,Caronia & Co. compared insurance company cash flow for the past60 years with premium changes and the beginning and end ofproperty-casualty market cycles.

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The firm said its analysis found that when carriers accumulatedlarge sums of cash, premium rates began to fall as companies soughtto become competitive once again.

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Under this scenario, CC&Co. predicts that premium rateincreases should decline "from 15 to 20 percent in 2003 tomid-single digits in 2004."

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This shift, the firm said, would result in diminishedperformance for brokerage firms. Brokers could expect to seerevenue growth to drop 50 percent and earnings to drop 30 percentin 2004.

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In a telephone interview with National Underwriter,Adam Klauber, managing director of equity research and the report'sauthor, said that the 30 to 45 percent revenue increases brokershave experienced during this hard market were driven by increasedcommission from the rate increases.

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Mr. Klauber said the loss from premium increases would affect 25percent of their growth in the future. He also noted that in thepast year there have not been any major mergers or acquisitionsamong brokers, which was another major driver in their revenuegrowth.

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"We have just not seen any big acquisitions this year, whichindicates the market has become more competitive," said Mr.Klauber. "Brokers have gotten bigger. It's a size proposition,there's limited opportunities in the $50 million and up acquisitionrange. As these companies have gotten to $400, $500 million, up to$2 billion in revenue, there are not many acquisitions left thatcan make an incremental difference [to their revenue]."

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However, the insurance brokers are not in trouble, just seeing adeceleration of growth.

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"[Brokers] are decelerating off of 10-year highs," he said."They are still going to average a reasonable rate of growth. Forthe sector, they will average 13 to 15 percent growth rate, and formost financial sectors that's pretty solid growth rate."

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He said over the next two years, into 2005, the industry wouldbe going into a moderating phase of premium growth, noting thatthere is still "a lot of weakness in the primary markets." However,he pointed out that reinsurers should see marked improvements intheir books as they move away from the underwriting difficulties ofthe late 90's and 2001.

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