Small insurance brokers with leaner operations may do better than their larger competitors and experience some modest growth through the current soft market, said a ratings analyst.

The comments came during Fitch Ratings teleconference to discuss its latest report, “Review and Outlook 2007-2008, Insurance Brokerage Industry.”

James Auden, managing director of insurance for Fitch Ratings in Chicago, said during the teleconference that the size of the smaller brokerage firms is an advantage because they are “much leaner” organizations with small staffs that can produce more revenue.

Bigger brokers, he continued, have more systems and bureaucracy to support, making them “less limber” to deal with pressures from a soft market and declining prices.

In its report, Fitch said after adjusting to the loss of contingent commissions, some of the larger brokers could see better performance, though modest, in 2007 compared to 2006, but that 2008 will probably provide flat to modest revenue increases. Fitch issued a stable outlook for insurance brokers.

Large brokers began giving up contingent commissions in the wake of a New York State investigation in 2004 that uncovered evidence that such commissions served as kickbacks to reward brokers that steered business and rigged bids with a select group of insurers.

Joining Mr. Auden during the call were Gretchen Roetzer and Greg Dickerson, directors with Fitch who reviewed Marsh, Aon and Willis.

Both Aon and Willis received primarily positive reports.

Ms. Roetzer noted that the sale of the company's insurance underwriting and adjustment arm since the loss of contingent commissions has put it in a strong position to justify a debt rating of “triple-B-plus.”

Mr. Dickerson said Willis, with a “triple-B” rating, has done well producing exceptional cash flow and excellent operating margins compared to its peers thanks to experienced management.

“Fitch believes Willis insurance operations has outperformed those of its closest competitors,” said Mr. Dickerson, “and will continue to do so for the next couple of years.”

On the other hand, while Marsh also received a “triple-B” debt rating because of its competitive position in the market place and diverse operational strength, there still are concerns. Mr. Dickerson noted that most troubling is recent turnover in management, which he said reflects the poor performance of Marsh, a subsidiary of Marsh & McLennan Companies.

“While Marsh & McLennan's rating outlook is stable, this instability does create more uncertainty in the rating,” said Mr. Dickerson.

He said the current rating would remain intact provided MMC operations “do not deteriorate from their current levels.”

During a question and answer period Mr. Dickerson said while MMC has suffered some damage with the loss of contingent commissions, the firm remains competitive.

“Our sense is that most of the bad news has come out,” he said, “but we are watching the situation carefully.”

In order to continue to compete, some brokers may be tempted to increase their debt, noted Mr. Auden. Going that route would raise flags and could change individual debt ratings if the debt becomes too high, he added.

Brokers will probably continue to make acquisitions of smaller firms, he said, but the types of larger deals by private equity firms seen in the past will probably be put on hold for awhile.

Concerning reports of pressure to break up MMC, Mr. Dickerson said its diversity is its strength and that while there could be some short-term gain, there would be competitive loss in its offerings.

In an interview with National Underwriter after the call, Ms. Roetzer said Aon's divestiture of its assets, such as the sale of its Combined Insurance Company, works in its favor because these are not core businesses. What remains at Aon are complementary core businesses that are competitive with Marsh offerings.

Special Reports /

Small Brokers May Outpace Big Ones In Soft Market

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