Brokers experience ‘exceptional’ second quarter; vigorous M&A activity

Stock Price Activity: Exceptional 2006 second quarter earnings reports had a positive impact on broker stock prices in July. Companies such as Brown & Brown (NYSE:BRO), Arthur J. Gallagher & Co. (NYSE:AJG), and Hilb Rogal & Hobbs (NYSE:HRH) reported impressive organic and internal growth rates for the second quarter of 2006 and as a result saw their stock prices soar the day earnings were released. After reporting overall internal growth of only 1.2 percent for the first quarter of 2006, Brown & Brown experienced a real turnaround for the three months ending June 30, 2006, with 6.8 percent in internal growth. Gallagher’s brokerage segment and Hub International (NYSE:HBG) both announced 9 percent organic revenue growth for the second quarter. Hilb Rogal & Hobbs also showed an increase in organic growth of 7.8 percent for the second quarter of 2006. The combination of organic growth and acquisition revenues gave rise to very solid earnings releases for the first half of 2006. Middle market brokers should hope these positive earnings will result in better stock performance, as brokerage stocks have seen only modest gains through July 31, 2006. Hilb Rogal & Hobbs’ stock price is up 5.8 percent, Brown & Brown’s is up 3.1 percent and Hub International’s is up a slight 1.8 percent. Arthur J. Gallagher & USI Holdings Corp. (Nasdaq:USIH) were down approximately 10 percent through July 31, 2006.

M&A Activity: Brokers continued their vigorous pace with 17 more acquisitions in July, bringing the year-to-date total to 104. In 2005, only 84 acquisitions had been announced during the same time period. There was a great variation in deal size in July. On the smaller side, Brown & Brown announced the asset acquisition of The Anderson Group, which has annualized revenues of approximately $1.2 million. On the other end of the spectrum, Hilb Rogal & Hobbs Company announced the signing of a definitive agreement under which HRH will buy substantially all the assets of Thilman & Filippini LLC, a Chicago-based insurance agency and brokerage firm, with 2005 gross revenues of approximately $24 million. Hub and USI both made acquisitions of companies with revenues of $9 million or greater. Hub International announced it intends to acquire Fortun Insurance Agency, a Florida-based insurance broker that will become Hub’s first regional hub in the Southeastern United States and serve as the platform for further expansion in the region. The Coral Gables-based brokerage adds approximately $10 million to Hub’s annualized revenue base. Hub will acquire the assets of Fortun Insurance (retail), ABCO Insurance (wholesale), and American Inspection Company, as well as the stock of ABCO Premium Finance. This was one of three acquisitions announced by Hub in July. USI announced the acquisition of Needham, Mass.-based Frederick E. Penn Insurance Agency Inc., which is expected to contribute approximately $9 million in revenue to USI on an annual basis. Frederick E. Penn was founded in 1949 and is one of the leading independent property/casualty insurance agencies in the Boston area. USI also made three acquisitions during July, which are expected to contribute over $20 million in revenue annually.

LMC Capital LLC is a national investment banking firm focused exclusively on the insurance industry. Services include highly qualified, industry-specific advisory relating to mergers and acquisitions, capital raises and valuations. The firm may be contacted at (704) 943-2600, by e-mail at Info@LMCCapital.com or visit: www.LMCCapital.com.

Topics Mergers & Acquisitions Agencies Profit Loss A.J. Gallagher