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Channel Check by Kevin Amrhein The Greater Whole

Wholesale divisions of large brokers boost revenues, aid in placements.

By  Christopher Hann

Wholesaler distributors play an important role in the marketplace, providing access to excess and surplus lines insurance for situations that demand it. Large brokers see value in having a wholesale division that is distinct from their retail operation.

You might say it fills a hole in their sales operation.

The wholesale division increases the revenue stream by generating business from the broad universe of unaffiliated agents and brokers. Hilb Rogal & Hobbs (HRH), the world’s eighth largest insurance broker, obviously sees the benefits of strong wholesale operations. The Richmond-based firm has completed two purchases of wholesalers this year.

In May HRH bought Global Special Risks (GSR), a wholesale broker that specializes in energy and non-marine property fields. With offices in Houston and New Orleans, Global Special Risks created product offerings for the London and North American markets.

Earlier in the year HRH purchased London-based Glencairn Group Ltd. An independent Lloyd’s insurance and reinsurance broker with $39 million in 2006 revenue, Glencairn provides a range of wholesale and retail products and services in a variety of areas.

HRH Chairman and CEO Martin (Mell) Vaughan III noted the London connection in a statement announcing the acquisition of Global Special Risks: “GSR’s extensive access to both the London and U.S. markets will allow us to continue building our excess and surplus capabilities in the larger complex property and energy areas, as well as further assist our entry into the Lloyds of London market.”

When it comes to deciding what to do with its wholesale operations, says Tom Riley, a regional president at Brown & Brown, there isn’t much of a decision to make. Brown & Brown has been buying up wholesalers at a steady pace. The largest company acquired by Brown & Brown in 2006 was Delaware Valley Underwriting Agency, a Pennsylvania-based excess and surplus lines wholesaler and public entity specialist with locations in six mid-Atlantic and northeastern states and about $21 million of revenue. Brown & Brown added four other wholesalers last year: Axiom Re, Excess & Surplus Lines Insurance Brokers, High Country Insurance Managers, and Residential Underwriting Agency. Brown & Brown’s largest wholesaler is Toronto-based Hull Group.

Taken together, the wholesale division contributed $163.3 million or 18.6% of total company revenues to Brown & Brown, up from $24 million in 2002. Not bad. And more than 80% of that comes from unaffiliated agents and brokers. That’s how you build a market.

Riley says that Brown & Brown and other large brokerage firms maintain a distance between their retail and wholesale sides. When the company’s retail agents need access to the E&S market, they go to the wholesaler who can best serve that particular client at that particular moment. In other words, they compete against themselves. Sometimes they win, sometimes not.

Tom Curtin is president and CEO of wholesale broker CRC, based in Birmingham, Ala. Founded in 1982, CRC had been the nation’s largest independent wholesaler before it was bought in 2002 by BB&T, the bank behemoth based in North Carolina. Today, Curtin says, CRC does less than 7% of its business with BB&T’s retail side.

Like Brown & Brown, BB&T buys wholesalers and then builds them organically to enhance its unaffiliated agent and broker revenues. Just look at the numbers. In 2006, CRC generated more than $3 billion in sales of property, casualty and professional insurance company placements, primarily for commercial businesses. The company has 26 offices across the country. BB&T’s total insurance commissions increased by $99 million to $813 million in 2006. CRC was responsible for about 40% of that growth.

Arthur J. Gallagher & Co. is the nation’s fourth largest brokerage and the largest with a wholesale operation. Gallagher formed its domestic wholesale business from scratch in 1997, and in that decade its division, Risk Placement Services, has grown into one of the largest wholesale brokerages in the United States, with much of the business generated by agents unaffiliated with Gallagher.

Gallagher reports that an increasing amount of wholesale business is coming to Gallagher via the company’s e-commerce portal, CoverageFirst.com, which has more than 18,600 registered users from among the ranks of independent agents, wholesale brokers and managing general agents.
A big reason large brokerage firms choose not just to maintain but build their wholesale operations (and it’s the same reason that private equity firms have been so eager to acquire wholesalers): It’s a profitable business.

“We consider it obviously a big part of our business,” says of Brown & Brown’s Riley. “We like the line of business, and we’re continuing to grow it.”

Hann is a contributing editor.

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