Insurance Wholesale Brokers Become Hot Potatoes and Hot Properties for Mergers & Acquisitions

Insurance Journal
By Andrew G. Simpson, Jr.
February 23, 2005

The decisions of two of the largest insurance brokers to sell off their wholesale divisions is a reaction to the Spitzer investigations and could be a sign of more to come, according to insurance merger specialists.

"This is absolutely defensive," said Kevin Donaghue, managing director, Mystic Capital Advisors Group in New York, in reacting to the news that Willis Group Holdings is selling its Stewart Smith unit to American Wholesale Insurance Group Inc. and Aon is shopping its wholesaler, Swett & Crawford.

Donaghue said that the brokers who own their own wholesale divisions are "clearly looking to get around the conflict of interest" concerns raised by New York Attorney General Eliot Spitzer in his charges against giant broker Marsh. Faced with expectations that they disclose to clients if they place business with their own wholesaler and further explain why they selected their own wholesaler over competitors, some brokers are looking to just avoid any potential conflict, Donaghue believes.

Steven Wevodau, chief executive officer of WFG Capital Advisors of Harrisburg, Penn., agrees that the charges and investigations by Spitzer and state attorneys general have "cast a different light" on brokerage operations.

"I do expect to see some repositioning mainly because of the Spitzer and attorneys general investigations," said Wevodau, who sees brokers returning to their basic business model.

Wevodau expects that the "lemming effect" will probably come into play, whereby other brokers follow the lead of those that have already decided to relinquish their wholesale divisions. He thinks brokers may also rethink their ownership of other entities as well, pointing to Aon's decision late last year to sell all of its interest in the Bermuda-based specialty insurer, Endurance.

The broker at the center of the Spitzer charges, Marsh & McLennan, owns its own wholesaler, Crump. Wevodau thinks Marsh may eventually follow the direction set by Willis and Aon and seek to sell Crump. A Marsh spokeswoman said the firm won't comment on rumors.

The defensive nature of the transactions could mean some sellers may not get top price for their wholesalers, Donaghue added.

Wevodau, however, thinks it is far from a "fire sale" and that sellers will still get traditionally high values.

As for potential buyers, Donaghue noted that Brown & Brown, the Florida-based broker, continues to be in a buying mode and tends to "march to its own drum" in building its insurance distribution network.

In addition to Brown & Brown, Wevodau would not be surprised if some super regional banks or a firm like BISYS take interest in a wholesale unit.

Another possible acquirer: employees. Insiders suggested that's a possibility for Swett & Crawford.

Whether the largest brokers choose to divorce themselves from their wholesalers remains to be seen but even without that happening there is likely to be activity surrounding the wholesale segment.

"Wholesalers are definitely in play," said Donaghue, referring to the overall insurance mergers and acquisitions environment.