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Softening rates also hit broking heavyweights

P&C (re)insurers aren't the only ones being stung by competitive pricing conditions as the listed brokers all experience top-line pressures.

The industry's "big three" reinsurance intermediaries - Aon Benfield, Guy Carpenter and Willis Re - all revealed varying signs of weakening organic revenue growth during the second quarter, as falling reinsurance rates squeeze commissions.

Aon Benfield suffered the biggest impact as underlying revenues contracted by 4 percent, - a significant reverse from 2 percent organic growth in Q2 2013 and the 3 percent expansion observed in Q1 2014.

The broking heavyweight cited unfavourable treaty market conditions and a decline in facultative placements for the decline.

Underlying revenue expansion also came under pressure at Willis Re after "good new business generation and strong retention rates" were offset by difficult market conditions. This resulted in "less than 1 percent" organic growth in Q2 2014, compared to the "mid-teens" growth achieved in same period last year.

Meanwhile, Marsh & McLennan Companies (MMC)'s reinsurance arm Guy Carpenter led the trio with 2 percent organic growth in Q2.

While this was better than the flat growth at Q1 2014 it still represents a slowdown year-on-year, as underlying revenues climbed by 5 percent in the prior-year period.

Despite pressure on reinsurance business, MMC's risk and insurance services division still managed to post higher organic growth of 4 percent for Q2 on both a year-on-year and quarter-on-quarter basis, driven by higher revenues at insurance brokerage Marsh.

On the primary side, Aon Risk Services (ARS) felt the squeeze, albeit to a lesser extent than the reinsurance segment. Its retail underlying revenue growth reduced by a half to 2 percent. As a result, the division's organic growth for the second quarter came in at 1 percent - a third of that achieved in Q2 2013 and the first quarter of 2014.

Willis outperformed with overall organic revenue expansion of 4.5 percent - albeit this was down from 6.3 percent growth in the prior-year period.

In fact, international business continued to be a strong revenue generator across the board, in particular emerging markets such as Latin America and Asia.

For example, Marsh posted a significant 16 percent increase in underlying profits for Latin America in Q2 2014, while Willis said that commissions and fees for the region were up in the mid-teens over the same period, driven by very strong results in Brazil.

Rising expenses

The big three reported a mixed picture on operating expenses, while unfavourable currency translation effects also played an important role in Q2 results.

Willis' group-wide operating expense base rose by 8.2 percent to $748mn in Q2 2014, primarily due to the influx of new hires in H1 2013 and a $16mn impact from adverse foreign exchange movements.

In contrast, Aon's overall second quarter operating expenses fell by 1.6 percent to $2.47bn, predominantly due to a $53mn decline in formal restructuring costs, which more than offset a $16mn hit from FX movements.

Meanwhile, MMC's Q2 2014 operating costs climbed by 5.6 percent year-on-year to $2.7bn.

Compressed margins

A combination of increased costs and top-line pressure also had a negative effect on profit margins for the second quarter.

Willis saw the largest margin compression after its Q2 underlying operating margin (a newly introduced measure that strips out FX movements) fell by 130 basis points (bps) to 16.1 percent year-on-year - the lowest within the big three.

Focusing solely on Aon's (re)insurance brokerage ARS, the unit's adjusted operating margin worsened by 20 bps to 22.7 percent over the period.

In contrast, MMC's risk and insurances services division posted a marginal 20 bps improvement in adjusted operating margin to 25.4 percent in Q2 2014 versus the same quarter of last year.

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