Regional Brokerages Not Immune To Slump, Execs Say

August 21, 2008

Large, regional 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 from the insurance slump and a few brokers report success in negotiating higher commission rates, some experts predict the slump will stay for a while.

“In August 2007, it was like somebody flipped a switch,” said Martin P. Hughes, chairman and CEO 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 S&P Insurance Conference in June 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 CEO of the wholesale insurance broker Crump Group Inc., and Michael J. Sicard, chairman, president, and CEO of USI Holdings Corp. The three discussed how the down cycle, possibility of further mergers and acquisitions, involvement of private-equity interests, and fallout from the 2004 contingent commission scandal will affect regional brokerages. Overall, regional brokerages carry an average credit rating of “B,” said panel moderator Michael Gross, a S&P director.

Although rate declines increased in severity in the past two quarters of 2007 – Howard said Crump’s rates dropped 15 percent in some lines since then – all three panelists agreed diversification has been a saving grace.

“Personal lines are less volatile,” Howard noted, “and are down 3 percent to 4 percent.” He noted the company is protected to a degree because roughly one-third of its business is in Canada, where market conditions are better.

All three executives said their companies benefited from businesses in the relatively resilient employee benefits market. “It offers some insulation against the soft cycle,” Sicard said.

There are possibilities for further consolidation in the industry, the executives predicted. HUB made 175 acquisitions in the past seven years and could make more. Hughes said the criteria HUB uses in identifying acquisitions are, “Does it improve our footprint? And primarily, is this going to build margin?” He noted there were “tremendous opportunities” to make meaningful acquisitions in Canada, where he foresees target prices coming down.

While organic growth will retain its importance in the coming year, Howard said Crump will look opportunistically at acquisitions, while being aware of integration risks. “You’re buying people and relationships, and not much else,” he said.

Sicard said it is paramount the target company’s personnel accept the acquirer’s goals and methods.

The brokers noted private equity owners’ take stakes in them, saying the experiences have generally been positive. “The benefit is eliminating the distraction of being a public company,” Howard said. “We’ve seen significant improvement without those distractions.”

Sicard agreed “It gives us the unique ability to do some things without focusing on monthly or quarterly reviews. You can have a longer time frame,” he said.

HUB’s private equity investors “have left us alone,” Hughes said. “But they’ve asked us to look at the business in a different way.”

With the P/C industry in a downturn, brokerages are working to control payroll and other expenses. On the revenue side, correctly managed contingent commissions are still important for some brokerages. Hughes said contingents account for about 7 percent of HUB’s revenues and 25 percent of cash earnings.

The panelists said given prior investigations, integrity is a focus for regional brokers. And despite the slump, smaller brokerages must maintain competitiveness, especially in bread-and-butter middle market segments.

“We have to get our names more well-known, beyond the investment and insurance companies,” Hughes added, noting that 2004’s industry scandals caused the insurance sector to look inward. “Any breach of integrity is intolerable. We’ll fire people.”

Was this article valuable?

Here are more articles you may enjoy.

From This Issue

Insurance Journal West

Insurance Journal Magazine