Analyst: Gallagher Could Be Acquisition Target

A financial analyst says the current economic crisis does not bode well for insurance brokers' earnings and one casualty of the fallout could be Arthur J. Gallagher, which could be acquired.

In an analyst's note, Meyer Shields with Stifel Nicolaus said the reduction in payrolls due to the economic crisis is posing "a strong headwind to the insurance brokers' domestic revenues." He said government statistics show a precipitous decline in employment since mid-2008 to a 3 percent-plus drop in February 2009.

That deterioration directly affects lines of business impacted by the employment figures, especially workers' compensation, employment practices liability insurance and employee benefits. Lower earnings can impact the amount of coverage businesses buy, as well as impact broker's earnings, he reasoned.

Among the five major brokerage firms, Mr. Shields said both Brown & Brown and Arthur J. Gallagher face earnings difficulties because their revenues are more dependent on commissions, which are highly volatile, than on fees.

The brokers have little exposure to reinsurance broking, which he says is seeing "positive rate and demand momentum."

He added that their "impressively lean expense structure" means little opportunity to cut further. Also, the firms' primarily domestic footprint means minimal exposure to developing markets that are still experiencing "rising demand for insurance products."

However, Brown & Brown is not an acquisition candidate due to "its unique culture," while Arthur J. Gallagher is "more likely to be acquired."

The other three major brokers--Marsh, Aon and Willis--while facing some of the same obstacles, have brokering exposure to reinsurance and other opportunities for "margin expansion" that will "lead to modest top-line growth and improving margins year over year, despite the economic climate."

Marsh, Aon and Willis are all rated buy, while Brown & Brown is rated sell and Gallagher rated hold.

A spokeswoman for Gallagher declined to comment on what she termed analyst's speculation.