IT WAS a bright and temperate summer for the Big Four insurance brokerages. In the flurry of second-quarter financial results, all four of the largest brokerages in the world – Marsh & McLennan Companies, Aon, Gallagher and Willis Towers Watson – delivered positive results, suggesting that times are good in the brokerage world.
The quarter included two major acquisitions: Marsh finalised its US$5.6bn purchase of JLT in April, and Willis Towers Watson completed its US$1.2bn purchase of TRANZACT, a direct-to-consumer healthcare firm that links individuals to US insurance carriers. Meanwhile, Gallagher snapped up 13 smaller brokerages, representing US$195m of annualised revenue.
“As [the big brokers] continue to invest in risk management and consulting services, their revenues keep increasing” Martha Butler, Fitch Ratings
Aside from M&As, Q2 saw all four brokerage giants continue to reinvest in their businesses to drive organic growth through additional risk management and consulting services. “The big brokers’ revenues are not solely dependent upon pricing in the insurance space,” explains Martha Butler, senior director of North American insurance at Fitch Ratings. “As they continue to invest in risk management and consulting services, their revenues keep increasing.”
Marsh & McLennan Companies [MMC] is the largest of the four organisations, generating annual revenue of nearly US$17bn. It’s also the only organisation to score a negative A- outlook from Fitch Ratings. This is largely due to the JLT acquisition and the financial leverage it required, explains Douglas Pawlowski, senior director of North American insurance at Fitch.
However, Pawlowski notes that MMC’s Q2 results “looked pretty good” and its revenue growth “was right in line with their expectations between 3% and 5%.” MMC president and CEO Dan Glaser said he was pleased that the brokerage was able to generate “solid growth in underlying revenue and adjusted EPS while welcoming 10,000 new colleagues” via the JLT merger.
Despite that impressive start, Pawlowski says it’s “way too early to call [the Marsh/ JLT merger] a success”, adding that “our rating sensitivities depend on how quickly and successfully they can de-lever. I found it interesting how they’re expected to have diluted earnings this first year and break even next year, so we won’t see any actual growth in earnings from this transaction until 2021.”
“It’s way too early to call [the Marsh/JLT merger] a success … Our rating sensitivities depend on how quickly and successfully they can de-lever” Douglas Pawlowski, Fitch Ratings
Aon, the second largest brokerage in the world by revenue, recorded “strong organic revenue growth” of 6% for the second quarter, which Butler attributes to the group’s divestitures and subsequent restructuring. “Everything they’re doing in terms of restructuring their business is going to make them more profitable in terms of growth moving forward,” she says.
Butler’s stance mirrors Aon CEO Greg Case’s comment in the company’s Q2 earnings release: “The steps we are taking to lead Aon United in response to increasing client demand, combined with significant investment in content and capability, is not only amplifying our ability to serve clients, but also our ability to deliver improved operational and financial performance that we believe will unlock significant shareholder value creation over the long-term.”
Six percent seemed to be the magic number for the London-headquartered brokerage behemoths in the second quarter. Willis Towers Watson also delivered organic revenue growth of 6% in Q2 for a total revenue of US$2.05bn. The company also achieved a double-digit increase (14.6%) in adjusted operating income growth, recording US$299m for the quarter.
Like Marsh, Willis Towers Watson completed a major acquisition in the quarter. At the time, CEO John Haley said, “This acquisition, coupled with our highly differentiated capabilities and disciplined management of the business, leaves us confident in our ability to continue to drive sustainable, profitable growth and deliver value for our clients and shareholders.”
From Fitch’s perspective, WTW’s “margins look good, their EBITDA to interest expense is marking up, and their debt to EBITDA is going down,” Butler says. WTW currently has a rating of BBB (stable) from Fitch but will remain under scrutiny after taking on around US$1.1bn in new debt via the TRANZACT acquisition. However, WTW has announced plans to reduce its financial leverage.
While Fitch doesn’t provide a rating for Gallagher, it’s clear the fourth largest brokerage is “acquiring a lot, and their margins look good,” Butler says. In addition to completing 13 mergers in Q2, the company posted total revenue growth of 13%, organic revenue growth of 5.8% and a net earnings margin of 12.2% – results that Gallagher chairman, president and CEO J. Patrick Gallagher described as “outstanding”. The firm’s brokerage segment performed well, reporting net earnings of US$138m, up from US$127.5m the year prior.