Marsh Begins Buying Independent Agencies

A day after announcing the acquisition of Texas independent agency Insurance Alliance, the head of Marsh & McLennan Companies said the firm could announce the purchase of several additional agencies by year's end, with more coming in 2010 as part of the firm's strategy to target more middle-market business.

MMC announced the establishment of its Marsh & McLennan Agency subsidiary in October 2008, saying it planned to make it one of the premiere insurance agency networks in the United States–offering commercial property and casualty, personal lines and employee benefits to client across the country.

MMC President and Chief Executive Officer Brian Duperreault said he has been encouraged by the quality of agencies his company has approached about a possible acquisition, but he noted that courting the targeted agencies has taken some time.

Mr. Duperreault spoke about the MMC agency initiative and the state of the market in a live interview with NU Editor Sam Friedman during The National Underwriter Company's 21st Annual Executive Conference for the Property and Casualty Industry, sponsored by Ernst & Young and Genpact.

Explaining MMC's agency initiative, Mr. Duperreault said it was determined that global broker Marsh was not as effective as it could be in the smaller-account space. The brokerage had tried to penetrate that client base, he said, but using the same approach it applied to large, national and international accounts was not working.

The brokerage decided to establish a culture and approach separate from Marsh to be successful in this space, and came up with a plan to acquire high-quality regional agencies, Mr. Duperreault said.

When Mr. Friedman asked why it has taken so long between announcing MMC's new strategy and acquiring its first agency, Mr. Duperreault explained the due diligence process is extensive, and while the inclination is to move more quickly, some agencies are not necessarily inclined to sell right away, and so courting them takes time.

This year's economic struggles have actually helped, rather than hurt Marsh's efforts in acquiring agencies, according to Mr. Duperreault, who said that while the mergers and acquisition market is still competitive, some who would normally be interested in acquiring agencies–such as banks and private equity firms–have disappeared or retrenched amidst the recession. On the other hand, he added, times of crisis could push agency owners to consider a sale.

The first agency acquired–Insurance Alliance–was described by MMC as one of the largest independent insurance agencies in Texas. Terms of the deal were not disclosed.

Houston-based Insurance Alliance has annual revenue of $15 million and serves over 1,500 commercial clients located primarily in Texas and throughout the Southwest, according to MMC.

Insurance Alliance has specialist teams serving clients in construction, surety, energy and marine, professional services, general property and casualty, and employee benefits, noted MMC. Established in 1992, Insurance Alliance has 72 employees.

In a statement, David Eslick, chair and CEO of Marsh & McLennan Agency, called Insurance Alliance “a well-managed and growing enterprise with a highly qualified professional team and a reputation for service excellence [that] fits perfectly with the national organization we are working to build at Marsh & McLennan Agency.”

In addition to announcing the acquisition, Marsh & McLennan Agency said Woody Woodard has been appointed CEO of its new Southwest operation. Mr. Woodard had been chair of Insurance Alliance. In addition, Insurance Alliance executives Jim Berger will be chief operating officer and Jim Tomforde will be vice president of sales for the Southwest.

Mr. Woodard said his organization looks forward “to helping build what we expect will be among the top national organizations in this industry.”

MARKET UPDATE

Back at the P&C Executive Conference, Mr. Friedman asked Mr. Duperreault about a prediction he made early this year regarding an “invisible hard market” emerging in 2009–in which prices would generally be rising, but premium growth would be flat or down thanks to shrinking insurable exposures in the recession.

Mr. Friedman noted that while insurable exposures have indeed dropped, prices did not rise except for select accounts and lines, such a disaster-prone properties, or financial institution liability coverage.

Mr. Duperreault replied there was much talk about prices rising, and he noted there may have been a sincere desire to raise rates. But ultimately, he said, the market is competitive, and if a company wants to hold onto a good account, it will drop its rates to do so if it must and can afford to.

He also said insurer balance sheets were not as damaged by the financial crisis as might have been expected. Companies still have adequate capital, he said, and that has helped keep prices down.

Joining Mr. Duperreault on stage was Peter Zaffino, president and CEO of Guy Carpenter & Company, where revenues were up 11 percent for the first nine months of the year and 13 percent for the third quarter–thanks in part to a more robust reinsurance market.

He noted that the property and casualty sector is still “awash in capital,” and the question going forward is “what will they do with [the extra money]? Return it to shareholders, or use it to fuel more price cuts?”

Mr. Zaffino said that even if there is a major catastrophe, it is easier now to recapitalize than it would have been earlier in the year, further stabilizing the market.

SETTLEMENT ANNOUNCED

In other MMC news, the company announced it has reached a settlement in a securities class-action lawsuit filed in 2004 in the U.S. District Court for the Southern District of New York.

The settlement, which is subject to final court approval, resolves all of the claims in the litigation against MMC, Marsh and the named individuals. The suits claimed damages against investors and pension funds in Ohio and New Jersey after insurance bid-rigging allegations against Marsh.

Without admitting wrongdoing of any kind, MMC said it has agreed to pay $400 million–$205 million of which is expected to be covered by insurance. MMC said it will use cash on hand to fund the remainder of the settlement, which will be tax deductible and result in a cash refund.

Separately, the company also announced that an ERISA class-action lawsuit filed in 2004 in the U.S. District Court for the Southern District of New York has been settled for $35 million–$25 million of which will be covered by insurance.

In a statement, the company said that “after more than five years of litigation, MMC believes these settlements to be in the best interest of the company and its stockholders.”

“While the company continues to deny all of the claims in these lawsuits, the resolution of these matters puts the litigation arising from the events of 2004 largely behind us and reduces the company's ongoing legal costs,” the firm added. “MMC is focused on the future and further strengthening its world-class businesses.”