Hard Market Boosts Broker Results

The fundamentals for both Marsh and Willis remain strong, according to Joanne Smith, executive director for UBS Warburg in New York. However, questions by the Securities and Exchange Commission about Chicago-based Aons accounting on prior-year reports, as well as a decline in the firms organic growth have raised concerns among investors, she added.

Aon said the SEC is reviewing the firms accounting reports for 1999, 2000 and the first quarter of 2002. Aon CEO Patrick Ryan said that a restatement in earnings for those periods could result in a reduction in earnings totaling $56 million. (See NU, Aug. 12, page 6.)

For the second quarter ending June 30, Aon reported no net income, compared to $29 million for the same period in 2001. Revenues increased by 11 percent compared to last years second quarter, up $205 million to $2.1 billion.

The bigger picture was better, as first-half revenues rose 13 percent to $4.2 billion, while net income soared 117 percent to $104 million.

While Mr. Ryan conceded that "the second quarter bottom-line results were the worst in Aons history," he explained that "certain unusual items, compressed operating margins, and lower investment income" were to blame. He said the brokerage firm has taken steps to improve performance, including management changes, and said he expects "significantly" improved results for the remainder of this year and into next year.

Aon also said it would be looking for alternatives to its proposed spinoff of Combined Insurance, either selling all or a portion of the carrier, or doing a combination spinoff and sale.

In the wake of its report, two New York-based investment rating agencies changed their outlook. Moodys Investor Service downgraded Aons senior debt to "Baa1″ from "A3." Standard and Poors revised its outlook on Aon from "A/Stable/A-1″ to "A/Negative/A-1."

Meanwhile, New York-based Marsh & McLennan Companies, the parent company of Marsh, reported that net income increased about 15 percent, rising from $293 million in the second quarter of 2001 to $336 million for the same period in 2002. Earnings per share increased 18 percent, rising from 51 cents for the second quarter of 2001 to 60 cents in 2002.

For the first half, M&Ms net income increased about 13 percent, from $662 million in 2001 to $745 million in 2002. Revenues were up slightly, from $5.17 billion to $5.2 billion.

Willis saw its revenues increase 22 percent for the second quarter of 2002, from $337 million in 2001 to $411 million for the same period this year. However, net income for the London-based broker fell due to a $78 million charge to Kohlberg, Kravis Roberts and Company for the firms 1998 buyout. Willis reported a net loss of $7 million for the second quarter, compared to net income of $17 million for the three months ending June 30, 2001.

For the first half, however, revenues rose 21 percent, from $712 million in 2001 to $862 million in 2002. Net income was up 9 percent, going from $56 million in 2001 to $61 million in 2002.

Ms. Smith said both Marsh and Willis showed signs of strength despite some economic drag on MMCs investment unit Putnam and its consulting unit Mercer, and Willis suffering the buyout charge.

Aons problems lie in its expense side, which "needs more transparency," she said, adding that the firm needs to better explain what appears to be shortfalls in its operating units.

"Willis and Marsh are doing very well," noted Ms. Smith, adding that Aon remains under a cloud until it resolves its outstanding issues and can fully take advantage of the "positive fundamentals" that its competitors are enjoying.

Overall, she said the insurance brokerage business appears quite strong, and with pricing not likely to soften anytime soon, that will help the brokerage industrys bottom line.

In the interest of disclosure, Ms. Smith added that UBS Warburg has no investment banking business with the three brokers. However, it did participate in the Willis IPO and its secondary offerings in November and May, she noted. She said she has no personal interest in any of the three firms.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, August 19, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.