Brown & Brown, Inc. (BRO), Arthur J. Gallagher & Co. (AJG): Who Will Profit From Insurance Industry M&As?

Expectation that mergers and acquisitions (M&As) in the insurance industry will take off again in 2013 appears to be materializing. This opens the possibility of significant power shifts among industry players, in turn unraveling some investing opportunities. In recent weeks, there have been some major M&As, which provide some insights into positioning of the equities concerned.

Brown & Brown, Inc. (NYSE:BRO)One is the $336.5 million acquisition by Brown & Brown, Inc. (NYSE:BRO) of its competitor, Beecher Carlson Holdings, which is ranked as the 27th biggest broker of U.S. businesses. Prior to the purchase, which will be consummated this July, Brown & Brown, Inc. (NYSE:BRO) already holds the seventh position among the world’s largest insurance brokerages, and its new acquisition should further bolster this standing.

Entering a new league

Having Beecher Carlson in its fold will take Brown & Brown, Inc. (NYSE:BRO) to the large-account business. All told, the acquisition can add roughly 8% to the company’s total revenue, per one analyst’s estimate.

In yet another move that should shore up Brown & Brown, Inc. (NYSE:BRO)’s competitive advantage in the industry, the company’s New York subsidiary acquired certain assets of The Rollins Agency, one of the top insurance companies in the tri-state region of Connecticut, New Jersey, and New York. Significantly, the new acquisition and asset purchase comes on the heels of Brown & Brown, Inc. (NYSE:BRO)’s $395 million acquisition of Arrowhead General Insurance Agency in December 2011.

A Texan hand into the mix

Also prominent in the insurance industry M&A scene is Arthur J. Gallagher & Co. (NYSE:AJG), one of the largest insurance brokers and third-party property/casualty claims administrators in the world. It announced this May that it is acquiring, for an undisclosed sum, the Weslaco, TX-based Garza Long Group (GLG). Founded in 2011, GLG provides a wide range of employee benefit program consulting services throughout Texas and the Rio Grande Valley.

Recently, Arthur J. Gallagher & Co. (NYSE:AJG)’s risk management services unit also entered into a strategic relationship with CastleLine Holdings. This tie-up is designed to provide clients with a wide range of innovative products and services in the origination, underwriting, and purchase of home mortgages.

A big move in life insurance

In the second half of 2013, Protective Life Corp. (NYSE:PL) is set to close the deal for its acquisition of MONY Life Insurance for about $1.06 billion. Protective Life Corp. (NYSE:PL) expects the deal to contribute $0.10–$0.15 per share to its 2013 earnings, $0.55–$0.65 per share in 2014, and $0.65–$0.75 per share in 2015.

Doing business across the U.S., Protective Life had about $3.6 billion in revenue last year and approximately $58 billion of GAAP assets last year. In the first quarter of 2013, the company’s net income amounted to $78.3 million, or $0.97 per diluted share, lower than the $99 million, or $1.18 per diluted share, a year earlier.

More favorable fundamentals

Brown & Brown, Inc. (NYSE:BRO)’s 2013 first quarter results, on the other hand, accelerated, with its net income up 21.6% to $60.1 million, or $0.41 per share, from $49.4 million, or $0.34 per share, in the same quarter last year. Similarly, Arthur J. Gallagher & Co. (NYSE:AJG)’s 2013 first quarter net income jumped 44% year-over-year to $40.5 million, or $0.32 per diluted share, from $28.1 million, or $0.24 per diluted share.

With these fundamentals, Brown & Brown and Arthur J. Gallagher & Co. (NYSE:AJG) seem to be the riper ones for the picking. Significantly, annualized earnings growth at Brown & Brown and Arthur J. Gallagher & Co. (NYSE:AJG) are outpacing the insurance brokerage business, with their respective growth of 20.95% and 27.31% against the industry’s 19%.

Protective Life, on the other hand, lags in the life insurance sector in terms of year-over-year earnings growth, with its 3.7% clip compared to the industry’s 7.9% pace. Up to what extent its recent MONY Life Insurance acquisition will eventually help improve the company’s growth rate bears watching.

Final take

Insurance companies offer enriching investment opportunities as the economic recovery continues to gain firmer footing. As in the scenarios in most sectors of business and industry today, success opens to those players who continue to reposition and reinvent themselves, as was manifested in the recent spate of M&As among insurance companies.

With the American markets reaching new highs, investors and pundits alike are skeptical about future growth. They shouldn’t be. Many global regions are still stuck in neutral, and their resurgence could result in windfall profits for select companies.

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Arturo Cuevas has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Arturo is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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