Large regional insurance brokers won’t be immune from the cyclical downturn hitting many sectors of the insurance industry. Although geographic and product-line diversification will offer some protection and a few brokers report success in negotiating higher commission rates, some experts predict the slump is here and will stay for a while.
“In August 2007, it was like somebody flipped a switch,” said Martin P. Hughes, chairman and chief executive of Chicago-based HUB International Ltd, who participated in a Standard & Poor’s Ratings Services panel discussion, “Market Challenges Faced By Regional Brokers,” at the 2008 Standard & Poor’s Insurance Conference on June 3, 2008, in New York. “It will go well into 2010 before we see any relief,” he said.
Along with Hughes, the panel included John Howard, president and chief executive of the wholesale insurance broker Crump Group Inc., and Michael J. Sicard, chairman, president, and chief executive of USI Holdings Corp.
Although rate declines increased in severity in the last two quarters of 2007 – Howard said Crump’s rates had dropped 15 percent in some lines since then – all three panelists agreed that a saving grace for each of them has been diversification. “Personal lines are less volatile,” Howard noted, “and are down 3 percent to 4 percent.” He also said one-third of the company’s business was in Canada, where market conditions are better.
All three indicated that their companies benefited from sizable businesses in the relatively resilient employee benefits market.
There are possibilities for further consolidation in the industry, according to these executives. HUB has made 175 acquisitions in the past seven years and does not discount the possibility of making more. Hughes noted that there were “tremendous opportunities” to make meaningful discrete acquisitions in Canada.
While organic growth will retain its importance, Howard added that Crump will look opportunistically at further acquisitions, while being aware of the integration risks. “You’re buying people and relationships and not much else,” he said.
Sicard added that it was paramount to be sure that the target company’s brokers and other personnel fully accept the acquirer’s goals and methods.
The brokers have become acquisition targets themselves, in a sense, as private equity owners have taken stakes in them. They say from an operational standpoint, their experiences have generally proven positive. “The benefit is eliminating the distraction of being a public company,” said Howard. “We’ve seen significant improvement without those distractions.” Source: S&P
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