Broker wars 2006: some commercial brokers are gaining market share as a result of the compensation controversy.

As the dust settles in the commercial broker compensation probes, those who stand to gain the most are reporting more market share and key new hires.

The probes, launched in October 2004 by New York state Attorney General Eliot Spitzer, most affected the nation's largest brokers--Marsh & McLennan Cos., Aon Corp. and Willis Group Holdings Ltd. As they fielded subpoenas and changed business practices in response to allegations of bid-rigging and improper handling of broker commissions, other commercial brokers moved in. Among those reporting gains are Hub International Ltd. of Chicago; USI Holdings Corp. of Briarcliff Manor, N.Y.; Hilb Rogal & Hobbs of Richmond, Va.; and Brown & Brown of Daytona Beach, Fla. "I don't think (top-tier brokers) own that marketplace anymore, clearly not as much as they used to," said Steve Deal, mid-Atlantic regional director for worldwide insurance and risk-management intermediary Hilb Rogal & Hobbs. "I think that clearly, some of the risk managers and those individuals charged with acquiring insurance for our corporations are looking at other options than Marsh, Willis or Aon. They're looking at so-called second-tier brokers."

USI Holdings has picked up some business from global brokers, said Jeffrey L. Jones, senior vice president and chief marketing officer. "Middle- and upper-middle-market clients are looking for sophisticated solutions, and there is a great opportunity for companies like USI to take market share in that marketplace, particularly with some of the value-added services we're focused on," he said.

Smaller brokers have not only gained ground on the top three or four brokers, but more importantly, they've gained the respect of risk managers, who now see options, Deal said. "If you're a risk manager, you used to be concerned about selecting somebody that wasn't a 'Big Three' because it was job security. Now they can look at a Hub or an HRH or a (Arthur J. Gallagher) and say 'I know I'm not losing anything by going with these people. And I may be gaining some.'"

Against this economic backdrop, USI saw continued opportunities for acquisition during 2005, buying 15 companies representing revenues close to $100 million. USI has been actively pursuing acquisitions since the company went public in 2002. In 2003, USI acquisitions totaled some $25 million in annual revenues; in 2004, they were about $65 million.

The buying spree continued with USI announcing Jan. 9 that it had acquired Walpole, Mass.-based Mahoney & Associates Insurance Brokers Inc., a move representing some $800,000 in yearly revenues. "We're very optimistic about what we see for '06," said Edward J. Bowler, senior vice president, corporate development of USI. "There's a lot of momentum on the acquisition side for USI."

Upstart Integro, a commercial broker established in the wake of the investigations, has already added to its operations by buying a Lloyd's broker. In December, U.K.-based Benfield Group Ltd. opened an office in South Korea's capital, as the reinsurance broker expanded its presence in what it sees as a growing market.

"The dynamics of the marketplace are changing pretty seriously. You've got to really be ready to take advantage of the opportunities that come along" Deal said. "I think it would be a very significant loss if you weren't positioned and ready to do this; you'd look back years later and say, 'We really blew it.'"

Talent Pool

Another way smaller brokers are gaining on the big guns is by recruiting their talent.

"It's not just the revenues we acquired, but the great people and talent that have joined our company through these acquisitions," USI's Jones said. "We've gained some great leaders and managers. Our production talent has increased; we've picked up a number of people with some great knowledge and skill sets.

"I think the turmoil in the industry has created a lot of dislocation of people, and we have been very proactive in selecting those people who would fit into our culture, "Jones said. "And we have been attracting some really wonderful talent around the country in technical, production and management roles from the global brokers."

Among the company's recent hires: former Marsh Senior Vice President William Sanders as president of its South Bay office in Torrance, Calif.

Hilb Rogal & Hobbs' Northeast Regional Director Hank Watkins said in a statement that his firm has seen more talent than business move down from the top four brokers over the past year. The word on the street is that "Aon, Marsh and Willis have been raided by Integro, Beecher Carlson and Lockton," Watkins stated. "To a lesser extent, A.J. Gallagher has lost people to these second-tier brokers."

Among the career moves:

* Integro has plucked executive talent from Aon, Gallagher and Marsh, including Marsh Canada's former Chairman and CEO Sheldon Rankin as chairman of Integro Canada Ltd.

* Beecher Carlson, the Atlanta-based broker and risk management consulting firm, opened an expanded Boston office in April with several executives culled from the top four brokers.

* Lockton Companies Inc. of Kansas City, Mo., the largest privately-owned insurance brokerage nationwide, hired several people from Aon, Marsh and various national brokerages since March 2004.

Last year was "fairly competitive" and featured movement of people, not just from global brokers, USI's Jones said. That, combined with a soft property/casualty market, "created a very competitive environment."

"I would not expect 2006 to be much different than 2005," Jones said. Brokers are positioning themselves in terms of what they're doing, who they'll be distributing to (in terms of how many sales people they have), and what they're going to be focused on, he added.

"We have a very aggressive producer recruitment program; we're continuing to refine that. While we're interviewing and looking at a lot of people, we're being selective about who we bring into the company to make sure it's a good fit for our culture," Jones said. "We're very focused on client retention, cross-selling, and proactive sales management models, so the people who come in have to fit."

"In 2006, you'll see continued a lot of instability in terms of people moving around," said HRH's Deal. "From my perspective just in the mid-Atlantic, we're continuously interviewing and visiting with some very, very top-level people who are, or have become, disenchanted with the major brokers for a long time. This creates a huge opportunity for us--one that we might not see again, certainly in my career in the insurance industry."

"We're attracting a lot of different talent," Deal added. "We really are either creating or buying, in some cases, the capability to dedicate to the major accounts. If you look at the situation in Philadelphia, clearly a lot of great people have left Marsh and Aon. There're a lot more people who would've left had the brokers that they wanted to come to had enough payroll or the ability to hire these people."

Watkins agreed. "I suspect that many more employees would have left had the second-tier brokers been able to hire them all," Watkins stated. "For a second-tier broker with money to invest in new talent and few of the Spitzer/(Connecticut Attorney General Richard) Blumenthal restrictions, last year provided a hiring window we haven't seen in years. I suspect we'll continue to experience an unsettled talent pool in 2006. The top-tier brokers will lose clients to second-tier firms as a result of the disruptions, but predicting how much and when is anyone's guess."

Brokers from all tiers will be watching closely to see which Marsh, Aon and Willis personnel stay with their companies, and which leave for greener pastures in the second tier.

"In my opinion, it's too early to tell if the playing field has been leveled, because many Aon and Marsh customers remain loyal to their service teams and/or may not want to leave before receiving what for many is a large post-Spitzer settlement check," Watkins added.

In the meantime, a lot of recent Hilb Rogal hires have backgrounds from Marsh, Aon or Willis. "We really have built out our capabilities over the last 18 months," Deal said. "It's funny; three years ago a lot of these people knew us, but they really didn't have an interest in talking to us because they didn't perceive us as competition. We've not only narrowed the gap, but we have outstanding people."

Market Watch

More than a year since the investigations were announced, most large brokers have settled with Spitzer or the U.S. Securities and Exchange Commission on these issues. "The clouds are lifting in some sense," said Robert Hartwig, vice president and chief economist at the Insurance Information Institute. After a definitive plunge at the end of 2004 and into much of 2005, broker stock prices finished above all other insurance industry groups last year, he said.

"We've actually seen a dramatic rise in the publicly-traded broker stock prices" Hartwig said. "Until about last August, we were down in the dumps."

Part of that spike was due to investors' expectations that a mini-hard market would develop after Hurricane Katrina and boost broker earnings, Hartwig said. Investors also noted that with the Spitzer investigation fading, broker stocks might be undervalued.

Deal concurred. "Investors obviously were looking at places where they could still capitalize and get a pretty quick return," he said. "Looking historically at national disasters or even 9/11, the markets clearly have firmed rather quickly and dramatically. This time around they were thinking that the prices would clearly escalate, but so far we haven't seen a lot of that in reality."

January renewals did not reflect a hardening of the market, he added. "We're still delivering some price decreases, and so it's pretty competitive."

Contingent Commissions 

Arguably the biggest change in the commercial broker environment is that the leading brokers have agreed to no longer accept contingent commissions and have paid combined restitution settlements of $1.2 billion. Groups such as Hub and USI are still able to use contingent commissions, Hartwig said.

"There's going to be, I think, an interest in the second-tier brokers. They may potentially be more profitable in the long run," he said. "They've not had this very lucrative revenue stream removed. The larger brokers have to find ways to replace the revenues they lost from the contingency commissions, and that has not occurred yet."

Hilb Rogal & Hobbs still collects contingent income on the agency-based lines, Deal said. To clarify, he noted, "Anybody that pays us a fee for services, we do not take contingent income on those placements."

Clients of USI are looking for more than transparency, said Jones. They're also looking for value. "I think people are holding brokers more accountable," he said. "We've had a disclosure policy for some time, and we've had very little inquiries from our clients re transparency, since most are upper--and middle-market accounts."

"Being at the top was really concentrated; Marsh, Aon and Willis dominated it," Hartwig said. "The second tier sees that, particularly given that they can still use contingent commissions. But they also may be trying to capitalize on some negative perceptions about the larger brokers by seizing on this and trying to grow."

* Broker commission requirements and related settlements caused the leading brokers to scale back operations over the past 18 months, while the loss of contingent commissions takes a toll on their earnings.

* Next-level brokers, still able to use contingent commissions, have that additional revenue stream.

* Second-tier brokers are narrowing the gap through acquisitions, picking up both business and personnel from the top-tier brokers.