The next hurdle: Brokers say July 1 reinsurance renewals will be the true test for the industry. (Industry Strategies: Brokers).

Insurance brokers warn that the next wave of post-Sept. 11 reinsurance treaty renewals could have considerable impact on insurance costs for larger corporations.

Conceding that the much-heralded round of Jan. 1 renewals passed without major disruptions, leading brokers recently told attendees of a conference in New York that the big results to watch for could come July 1, when most large-account under-writers face renewal deadlines.

"A lot of the major programs in the World Trade Center did not renew on Jan. 1, and they're coming in on July 1," said Roderick P. Thaler, executive vice president and national director of Willis Re. He addressed the 2002 Insurance Brokerage Investor Conference sponsored by Cochran, Caronia & Co. in February.

"I don't think we saw the full impact in January," agreed Gregory T. Doyle, executive vice president, strategic planning, for Guy Carpenter & Co. "With the advent of time, we'll be better prepared for the July 1 renewals."

Doyle predicted that the next renewals will see the purchase of "a meaningful amount of reinsurance," along with some moderation in some lines of business.

At year's end, renewals generally were late, showed wide dispersions in price and carried terms and conditions that were much narrower in scope, said Chris T. Brocket, executive vice president and principal of Towers Perrin Reinsurance. "There has to be enough fear in the market to force everybody to go in the same direction," he said. Any substantial changes that reinsurers made in programs on Jan. 1 primarily were driven by budget issues based on numbers that companies previously supplied, he noted.

Triple-Digit Increases

Companies with good loss experience and no effects from the events of Sept. 11 incurred small to medium price increases in rates aligned with what was happening in the primary lines, Doyle said. But in some cases, carriers with poor results prior to Sept. 11 were looking at triple-digit price increases, he said. This applied equally to national and regional carriers.

Thaler said that at the end of 2001, his firm saw reinsurance prices moving up in property, casualty and specialty lines. "We're seeing a 75% or higher retention increase, and the scope of coverage is being reduced," he said.

J. Patrick Gallagher, chairman and chief executive officer of Arthur J. Gallagher & Co., said the reinsurance market is softer than the primary market. "Sept. 11 had a big influence on the reinsurance community, but there's still enough capacity because of capital to get good deals done," he said.

If there's sufficient reinsurance capacity on the property/casualty side, that's not the case for accident and health, brokers said.

"What's been looming for a number of years has gotten bad," said Donald W. Van Dyke II, founder and chairman of D.W Van Dyke & Co., a large, privately held reinsurance brokerage firm in accident and health. "We've seen incredible shrinkage in reinsurance capacity and the number of markets we can go to," Van Dyke said. "It definitely puts a hurt on you. We are constantly on the lookout" for reinsurance, he said. His company's major clients include Mutual of Omaha, Prudential and Standard Life.

Several companies used to deal with disability, "but disability and workers' comp--that's the wolf," Van Dyke said. He blamed the shrinkage on the Unicover workers' compensation pool failure, which prompted some reinsurance direct writers to go out of business, and on industry consolidations.

Meanwhile, some property/casualty companies looking to diversity are venturing into the accident and health arena. "We see some Bermuda companies coming in and some new ones in the States that are P/C oriented," said Donald K. Drelich, president and chief executive officer of Van Dyke & Co. "We're a little concerned that the reinsurance capital in Bermuda might flow into our area and cause it to go soft again."

Alternative Market

In this pricing environment, with primary carriers sometimes seeing reinsurance rates soar 40% to 50%, some brokers say there is renewed interest in self-insurance, also known as the alternative market, as well as financial-trading products such as securitization, a free-market tool that gives insurers additional capital to manage catastrophe and other risks.

John F. Cay III, chairman and CEO of Palmer & Cay Inc., noted that his clients are favoring the alternative-market route for their insurance needs. "There's a great deal of activity in that, and I think it will continue at a torrid pace," he said.

Probably half the insurance market in one way or another is touching the alternative market today, Gallagher said. "There's a tremendous sea change going on, like the alternative market in the 1970s," he said.

Van Dyke's firm hopes to introduce finite coverages and securitization, something unheard of on the accident side, he added. "It's going to take a large company that's got a lot of cash flow," he said.

Brocket of Towers Perrin said he has yet to see any figures showing that the volume of securitization is on the increase. "That's a reflection of the fact that there are abundant reinsurance funds right now," he said.

As for the world's reinsurance markets, Thaler noted that Bermuda has become more active with the launching of nine start-ups since Sept. 11. "With the new capital, it's only a matter of time until Bermuda takes a leading role, and leaders tend to get the better signings," he said. "The key is going to be their ability to use capital at April 1 and the other renewal dates." The question also remains just how much of the announced capacity in Bermuda was actually used by year's end, Thaler said. Bermuda's capacity is $350 million to $500 million, whereas the capacity of the London market is half that, he said.

The London market has survived the liquidity crunch, but the ability to buy reinsurance there on a retrocessional basis for individual risks is going to be constrained, Thaler said.

Increased capital also has flowed into the U.S. reinsurance market, in turn boosting the broker-market share. "The U.S. market is going to be the direct beneficiary of underlying improvement in rates," Thaler said. "We're going to see a greater opportunity for augmenting facultative volume, given the underlying rate improvement." U.S. reinsurers are well positioned to take advantage of this upturn because they have deeper underwriting staffs, he added.

Opinions varied on the duration of the hard market. "I believe we've got two to three more years of a positive rate environment with 10%- to 20%-type increases," Gallagher said.

But Cay of Palmer & Cay foresees at least 18 more months of price increases, and "then my crystal ball gets real foggy," he said. Brokers are fighting a tailwind, given that rates are going up so dramatically, Cay said. "It's taking weeks and weeks to do what previously just took days," he said. "It's creating more opportunities and revenue growth for us, but it's also creating more headaches."

RELATED ARTICLE: Brokers Continue to Eye Consolidation

Top executives of some of the fastest-growing insurance brokerages say that despite years of consolidation, merger-and-acquisition opportunities abound in the still-fragmented industry.

Andrew L. Rogal, chairman and chief executive officer of Hilb, Rogal & Hamilton Co., said to be the 10th-largest insurance and risk-management intermediary in the world, wants the company to become the premier middle-market insurance and risk-services intermediary in the United States. To do so, the company continues to explore acquisitions that will expand its geographic base, its specialty expertise and its books of business.

"There is an enormous opportunity for consolidation in this industry and for people who are true consolidators, not aggregators-this is very different from just acquiring agencies," Rogal told attendees at the 2002 Insurance Brokerage Investor Conference sponsored by Cochran, Caronia & Co.

Adam Klauber, managing director of equity research for Cochran, called Hilb, Rogal & Hamilton "one of the fastest up-and-coming regionals in the past four to five years."

Rogal said his company did $60 million in acquisitions last year in 14 separate deals. "We've looked at every significant opportunity in the industry in the last five years, but we're very selective; we have to be accretive," he said. "The object is value creation and excellence." After all, he added, the company is always mindful that two-thirds of transactions erode shareholder value.

In fact, while he was in New York to attend the Feb. 26 conference, Rogal admitted he also was on "a bit of an acquisition trip."

Rogal said his company's benchmark acquisition was the purchase of American Phoenix in a May 2001 transaction that increased the size of Hilb, Rogal & Hamilton by more than 25%.

The firm's merger-and-acquisition activity is about 10% to 15% of its revenue on a yearly basis, Rogal said. The brokerage works very closely with growth plans and expects to announce a new one in May, he said. "We are committed to a bare minimum of 15% pure operating earnings [growth] a year," Rogal said.

When asked if his company ever made a bad deal, Rogal only would say that his experience "is really trench experience. If you can't integrate the deal, it's bad. We have learned enormously from our experience."

J. Patrick Gallagher, chairman and CEO of Arthur J. Gallagher & Co., said that of the numerous acquisitions by the company's brokerage division, it would not have done, in hindsight, probably six deals. "We talked ourselves into something," he said.

A.J. Gallagher is the fourth-largest domestic broker and the leading broker to the middle-market brokerage sectors, Klauber said. He said in his analysis that the company has built sufficient critical mass to become the first super-regional broker.

The brokerage services division, the largest of the company's four divisions, reported $523.4 million in revenue in 2001, compared with $155.6 million in 1991. More than $350 million of the 2001 revenue was from acquired entities, the company said. "Last year was probably our best acquisition year ever," Gallagher said.

John E. Cay III, chairman and CEO of Palmer & Cay Inc., said his firm also is growing rapidly among regional brokers. Benefits consultation represents about 40% of Palmer & Cay's business. Rather than buy up entire companies, Palmer & Cay prefers to grow by acquiring blocks of employees. The Savannah, Ga.-based company recently acquired KPMG's Washington-Baltimore office and has added more than 100 people from Marsh, Aon and successor firms. "This is a lot of talent from national brokers," Cay said. "Our focus is a strong talent mindset."

The goal is to place Palmer & Cay among the top five brokerages in major cities, and in the No. 1 spot in secondary cities, he said.

"We think acquiring groups of people as opposed to acquiring firms is a low-risk strategy for us," Cay said. "When you are acquiring a whole firm, invariably there's baggage in there."

Palmer & Cay now has Arthur Andersen in its sights. The accounting giant ensnared in the Enron scandal also has an enormous employee-benefits program group, Cay said. "We'd be very interested in talking to that talent," he said.

Brokers and Banks Create Culture Clash 

Insurance brokers and banks aren't always a perfect fit. Just ask Frank C. Witthun, president and chief executive officer of Acordia Insurance Brokers. Wells Fargo & Co. purchased ACO, an independant property/casualty company and Acordia's parent, in May 2001.

Acordia and Wells Fargo Insurance combined had $630 million in revenue and 176 stores in 38 states, making it the largest bank-owned insurance agency in the country, Wells Fargo said. Acordia had 3,860 employees, including 780 agents, while Wells Fargo Insurance had 1,654 employees, including 140 agents.

Wells Fargo saw the union as a way to evolve from banking to a diversified financial-services organization.

But the early months following the acquisition proved difficult, Witthun told other top executives of brokerages at the 2002 Insurance Brokerage Investor Conference in February.

"You can't integrate into the bank--the cultures are just too different," he said. "Banks have a history of not creating value. Bankers think they make a sale if they give you a loan."

To Wells Fargo's credit, however, it realized the arrangement wasn't working and made changes, Witthun said.

Now, Acordia has gotten its name back and basically functions as a subsidiary company, he said. "We have stayed away from bank products," Witthun said. "We do not sit in bank branches, and we have no intention of trying to sell something through the banks."

All in all, it has worked well for Acordia to be part of a large financial institution, he said. And Witthun predicts that Wells Fargo will use Acordia to get into the insurance business in a bigger way.

At the time the Wells Fargo-Acordia deal was announced, five banks had reported plans to collectively acquire just under $1 billion of insurance revenue during the next three years, said John M. Wepler, senior vice president, merger-and-acquisition services, for Marsh Berry & Co., a national management-consulting firm for the financial-services sector. This is 50% more than the revenue of the third-largest insurance agency in the United States during 1999, he said. "Once the Wells Fargo/Acordia deal closes, the floodgate will fall off its hinges," Wepler predicted at the time.

Wells Fargo Insurance, a subsidiary of Wells Fargo & Co., is a financial-services company with $272 billion in assets and offers banking, insurance, investments, mortgage and consumer-finance products and services worldwide.

Under Witthun's leadership, Acordia went public in 1992 and accomplished 61 acquisitions. "We wanted market share, and we acquired business through acquisitions," Witthun said. "Basically, we went to a lot of secondary cities."

Then came a management buyout, and Witthun took the company private in 1997. Over the years, he helped build Acordia's revenue from zero to $650 million, and operating profit from $27 million in 1997 to $87 million in 2000. Today, the company is the fifth-largest insurance brokerage firm in the world with 4,000 employees and 170 offices nationwide.