Producers Face Tough Climb For Rest Of 2010

There is probably little debate that 2009 was one of the toughest years in a long time for insurance agents and brokers, who confronted the dual challenges of a continued soft commercial lines market and the lingering effect of the recession, which shrunk insurable exposures, reduced commissions and inhibited organic growth.

Indeed, 2009 fourth-quarter property and casualty premium rates continued to fall at the rate of 6 percent on average–unchanged from the third quarter, according to the Council of Insurance Agents and Brokers' “Commercial P/C Market Index Survey.”

The survey found that lower demand for insurance continued to put pressure on rates as carriers competed for new business.

“We don't expect to see pricing turn upward until demand picks up and capacity diminishes,” said CIAB President Ken A. Crerar.

The fourth-quarter and year-end results for the five major publicly traded insurance brokers was mixed, reflecting the economic reality and ongoing soft market.

Marsh & McLennan Inc., parent company of insurance broker Marsh and reinsurance broker Guy Carpenter, along with Daytona Beach, Fla.-based broker Brown & Brown both reported a drop in fourth-quarter net income. Aon, Willis and Arthur J. Gallagher reported net income gains, helped by cost controls.

Of the five, only Willis reported an overall gain in organic growth, with new business gains helping boost income by 2 percent.

Brown & Brown suffered the biggest hit, recording a drop of 8 percent.

Cory Walker, chief financial officer for Brown & Brown, said the firm took a major hit in commissions and fees in the fourth quarter, which reduced contingent commissions by more than $4.4 million. Earnings were also undermined by losses in its investments and other income.

The brokers were not optimistic about 2010 when they spoke to investment analysts in February.

Brown & Brown President and Chief Executive Officer J. Powell Brown said there appeared to be no short-term prospect of a turnaround, as the market remains extremely competitive and prices are still down, or at best flat.

“If you believe what you read and hear about the economic outlook, it appears flattish,” said Mr. Brown. “How that translates into our business, we don't know.”

Marsh Chair and CEO Daniel S. Glaser said his brokerage's revenues were challenged by clients' cost consciousness to a degree that “we have never seen before,” adding that many buyers substantially cut discretionary spending, affecting their insurance purchasing habits.

“I think the economic impact is the single biggest factor,” he said. “It is much broader than the insurance cycle. The insurance cycle over my career…has been soft. I think Marsh can improve in any sort of insurance cycle. The economic impact has been considerable.”

Aon President and CEO Greg Case said that for 2010 the brokerage expects to face continuing headwinds without dramatic improvement during the year. The firm turned around a 2008 fourth-quarter $6 million net loss to net income of $198 million for the fourth quarter of 2009.

Arthur J. Gallagher, which reported that fourth-quarter profits rose 72 percent, saw its growth primarily from expense control including the elimination of 4 percent of its work force in January 2009 and 2010, plus the integration of Liberty-Wausau business it acquired in 2009.

J. Patrick Gallagher Jr., the brokerage's chair, president and CEO, said he believes 2010 will be another tough year for the firm, as premium prices remain in their soft market state and the economy makes a slow recovery.

Willis Group Holdings Chair and CEO Joe Plumeri was the most optimistic, as his firm reported net income grew 27 percent in the fourth quarter.

“The best thing I can say is that 2009 was an amazing year as we tackled a number of external and internal challenges,” he said. “In the middle of a soft market environment and a global recession, we delivered.”

More recently, three insurance executives discussed various aspects of the insurance market as they see it today.

Two executives with Kansas City, Mo., insurance broker Lockton–Gary Phillips, senior vice president of the Financial Services Group, and Ray Beegle, senior vice president and Northeast property practice leader–said they viewed their respective market practices as far from turning hard, noting that competition for business still remains the overriding drag on pricing.

On the directors and officers side of the insurance market, Mr. Phillips said that in terms of capacity, “there is a lot more supply, and demand has stayed the same,” putting the damper on pricing.

One major problem insurers are having is that people are leaving companies and joining new insurers with their sights on starting up a new D&O operation. Those additional players, in turn, have increased the supply of capital in the marketplace, exacerbating the soft market, Mr. Phillips pointed out.

Any turn to a hard market has not materialized, he noted, as the issues over companies losing shareholder value over losses from credit default swaps has diminished. “The dust has settled,” he said.

Mr. Phillips said he did not see any change in direction for the D&O market for the remainder of the year, and there is nothing out there to indicate that there is any hardening in the offering.

“Until the supply [in capital] is turned off by a merger or an insurer going out of business, I do not see any change in the next six-to-12 months,” he said, predicting that the pricing environment would remain flat to moderately declining, with clients pursuing improvements in their coverage in this buyer's market.

Property is a tale of two distinct marketplaces, according to Mr. Beegle–catastrophe versus non-catastrophe, as well as new business versus renewal.

While there is little competition for property-catastrophe risks, non-catastrophe business is seeing aggressive competition. While a good catastrophe risk can see stable rates or even a modest decrease, an equally good non-catastrophe risk can see price reductions of 10-to-15 percent, he said.

For catastrophe risks, 2009 appeared to be steering toward a hard market, observed Mr. Beegle, but the benign hurricane season meant a surplus of unused capacity, translating into a more competitive marketplace by Jan. 1 of this year.

When asked about comments from some insurance company executives who have complained about the irresponsible pricing of risk, Mr. Beegle said he has not seen any “real renegades out there.” But he credited insurers with taking a realistic view of risk and pricing it appropriately in response to the amount of capacity that is available.

He did not see any major shift in the near term, but Mr. Beegle added that catastrophe is a “fragile” line–noting that a major catastrophe or series of substantial disaster losses could cause a “different discussion” later this year.

On the wholesale side of the insurance market ledger, Glenn Hargrove–former CEO of Crump Inc., who is now president of the start-up brokerage MarketScout Wholesale, a unit of the online Dallas-based insurance exchange MarketScout–said the major challenge for wholesalers in the current market is finding their value proposition. The line between retail and wholesale carrier has blurred, he said, and wholesale brokers have to bring value to the table to remain players in their own right.

“They have got to offer value or not be involved in the equation,” said Mr. Hargrove.

Wholesalers may be seeing stabilization in the percentage of business they deal in, but the ability to increase the business is not gaining traction.

The major challenge, he believes, will be for those wholesale brokers owned by private-equity firms. There was no intention on the part of these investors to make a long-term commitment to the wholesale market, he believes, and with the economic crisis now passing, he thinks that segment is in for a lot of turmoil.

“We'll see how it all shakes out,” he said.

If producers cannot grow organically, there is always the opportunity to buy additional marketshare, and for the coming year, independent agency consultants say one revenue driver for some agencies–acquisitions–will begin to heat up in 2010 after a very quiet 2009.

“Most feel the worst is over,” said Robert Lieblein, managing principal with Hales & Company.

With the worst of the economic crisis “bottoming out,” he believes there will be an uptick in demand this year. There was too much deviation between the buying and selling prices last year, running at about 4.5-to-5 percent of EBITDA (Earnings Before Interest, Tax, Depreciation and Appreciation), which meant there “was not a compelling reason to do a deal under those prices.”

While there may be some increase in M&A activity, Mr. Lieblein believes prices will remain low unless there is a major entrant into the market to buy agencies.

He said he believes the time is ripe for a major acquisition in the wholesale market, most likely coming from private equity.

Organic growth will remain difficult, he noted, so in order to grow, agents and brokers will need to find a way to differentiate themselves in order to attract new business.

“Growth is hard to come by right now,” observed Tom Doran, senior vice president and principal for Reagan Consulting, a frequent “Best Practices” columnist for National Underwriter. He said a survey of 110 firms conducted by Reagan of private agencies and brokerages found organic growth declined 2 percent in 2009, while their profit margin was down 10 percent over the previous year.

He expects 2010 to be flat, with some indication for minor improvement. It will be a number of years before firms will see any significant turnaround, he added.

Despite the recent “spectacular deal” announced by insurance broker Marsh of the Rutherfoord Agency–for which Reagan served as a consultant–he did not see it as something to draw many conclusions from.

“It will be a somewhat muted deal year,” he noted.

The most pessimistic assessment of the marketplace came from John M. Wepler, president of Marsh Berry.

“We have seen a slight reversal from soft rates to slightly softer,” said Mr. Wepler. “Agents can't count on a level market or hard market for 2010″ to improve their commissions.

Insurers are performing well and there is nothing to put pressure on rates, he noted. However, with the release of reserves through 2010, he said there is real hope for rate stability in 2011.

Insurers are primarily concerned with losing market share at this point, he explained, keeping rates soft and thereby placing agent compensation under attack.

To help their bottom line, some insurers, he noted, plan to reduce contingent income, while others intend to increase premium volume requirements (he placed the figure at 12- and 10 percent of all insurers, respectively).

A lesser number intend to add growth requirements and improve retention requirements, while 3 percent plan to eliminate contingent commissions altogether, he said.

To drive business, he suggested, agencies must gear themselves to become high performers. That means driving organic growth and investing in the next generation of producers.

“Those that drop revenue can't cut expenses fast enough,” he pointed out, “while those that are growing do not worry.”