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World-class contender: Lockton Companies' acquisition of the international business of Alexander Forbes has catapulted the private insurance broker into a top global player.

Jack Lockton couldn't have envisioned in 1966 his basement operation in Kansas City, Mo., doing business as far away as St. Louis--just 250 miles away--let alone in Kuala Lumpur, Malaysia, which is among the many places around the world where Lockton Cos. currently operates.

David Lockton, now chairman of the insurance brokerage firm, said his brother Jack started the business with just an answering machine and couldn't have realistically imagined he was creating a global enterprise, although he designed the company logo with a globe on it. "He must have had the dream at the back of his mind," the younger Lockton said.

When Jack Lockton died in 2004 after a long battle with pancreatic cancer, Lockton Cos. was ranked among the top 15 insurance brokers in the United States and had more than 1,600 employees. Today, it has about 3,700 employees in more than 13 countries, and is the world's largest privately-owned insurance broker.

Lockton's growth has been most unconventional by industry standards. Over the past 40 years, the company has grown almost entirely through business written or renewed by its producers, and not through acquisitions, which is the industry norm. Of the $470 million of U.S. revenue projected in 2007, for example, less than 5% represents revenue acquired over the years, said President and Chief Executive Officer John Lumelleau.

The company's growth rate, averaging between 15% and 20% annually in the past decade, is driven by new business and a 95% client retention rate, among the highest in the industry, according to the company. Based on the trajectory of its revenue growth, one senior executive predicted that the company will soon be among the top six largest insurance brokers in the world.

David Lockton said the company's growth will depend a lot on its clients, as opposed to acquiring other entities just to fatten its market share. Also, "most insurance brokers that are for sale are for sale for a certain reason. They don't really meet our quality standards or fit into our culture," he said.

A New Strategy

But despite David Lockton's suspicion of insurance brokers that are for sale, the company announced in August 2006 that it was acquiring the international risk and insurance business of South African-based broker Alexander Forbes. The company pursued the deal because it felt it was time to address the international needs of its growing client base in the United States. Prior to the acquisition, Lockton was ranked the 14th-largest global insurer, according to the Best's Review ranking of Top Global Insurance Brokers.

Mike Hammond, executive chairman of Lockton International, the new name of the acquired Alexander Forbes business, said prior to the acquisition, Lockton routinely partnered with Alexander Forbes International Risk Services and its European partners to service the needs of clients overseas. Thus, when AFIRS was put on sale in June, Lockton clearly was the most ideal buyer, said Hammond, who was hired specifically to execute the sale.

"A lot of people have asked why we didn't get sold to Marsh or Aon or any of the larger brokers, which is an obvious thing. I wouldn't have taken the job. I thought this was an opportunity to create something new; a large, privately owned international insurance broker is something that hasn't been done for a while," Hammond said.

Peter Staddon, a 37-year industry veteran who is head of technical services of the British Insurance Brokers Association, said there are several reasons to celebrate Lockton's emergence on the global stage. "No disrespect to the nonprivate companies, but I've always felt the private companies are in this business because they want to be. I like to think they're a little bit more personal, value relationships, and they're not purely after the bottom-line. They're private and they can put their money to other areas, but they chose to be in insurance."

Lockton paid $163 million for the Forbes business, a sale price that some insurance analysts felt did not reflect the potential of the business. If it was a bargain for Lockton, perhaps, it was because, as Hammond said, "Alexander Forbes International Risk Services business on a consolidated basis doesn't look as though it had too many jewels in the box. As a consolidated business, they have certainly not performed as well as they could have or should have done."

But pull them apart, and you'll find pockets of the business, such as professional liability, that have been extremely successful over the years, said Hammond. For example, AFIRS is the largest broker to both solicitors and accounting professionals in the United Kingdom.

One other key benefit of the Forbes transaction is that it allows Lockton to become a partner of EOS Risq, an alliance of privately held European brokers that sell and service business together. "It's a very strong partnership of very well-regarded private insurance brokers, and we're proud to be partners with them," Lumelleau said.

Planning on Growth

Lockton projects that its newly formed international business will bring in about $200 million in revenue next year. That number will grow, as the company solidifies its new position as a global player. The broker expects to further penetrate the Fortune 1000 and gain more U.S. multinational companies as clients. Currently, it has about 120 clients in the Fortune 1000.

Lockton expects to continue its mid- to high-teens top line growth, Lumelleau said. "We see that across our business segments, in Lockton's property/casualty business, our employee benefit business, our affinity business, across the entire spectrum."

Lockton Benefit Group, which has just launched an international division, expects to bring in about $100 million this year. While the international practice represents less than 2% of the total revenue, Mike Brewer, its chief executive officer, said he expects the international business to grow to about 10% of total revenue. Brewer said the company is eyeing opportunities in Asia and experiencing a surge in demand for services in Canada.

On the recruiting front, Lockton has in recent months hired a number of top producers from competitors. (See "Lockton's New Leaders Include Julian James" on page 70.) Lockton believes one reason it's been able to attract talented professionals from every segment of the industry is that it's a private company.

"I spent 10 years with a public broker and all the frustration around that. It's easier to deploy resources in a privately-held company than a public company. A lot of people we talk to are working for the public companies, and once they crack the code, understand the difference, and the light goes on in their head, recruiting becomes a much simpler process," Brewer said.

And so, even as its business expands around the world, Lockton is determined to remain private and independent. In fact, few things matter more. It's an entitlement in which employees take pride. It's a value proposition that executives believe is critical to the company's success, and David Lockton plans to keep it that way for another 40 years. "We're not in the business for short-term profits. We have a company that's growing at a rate of 20% a year. Who would want to sell a great company like that?"

Key Points

* Over the past 40 years, Lockton Cos. has maintained a steady rate of growth almost entirely through business written or renewed by its producers.

* In August 2006, the company announced it was acquiring the international risk and insurance business of South African-based broker Alexander Forbes.

* Even as its business expands around the world, Lockton is determined to remain private and independent.

Lockton Cos.

* Headquartered in Kansas City, Mo.

* Founded in 1966 by Jack Lockton

* David Lockton, current chairman

* Company made $50,000 in revenue first year

* Growth rate in the past 10 years between 15% and 20%

* Acquired Alexander Forbes International Risk Services in 2006 for $170 million

* International operations in 12 countries including United Kingdom, Ireland, Mexico, Brazil, China and Thailand

* 3,700 sales associates

* Projects $661 million in revenue in 2007
Lockton Revenues by Division

Projected Fiscal
($ millions)

U.S. Property & Casualty $341
U.S. Benefits $96
U.S. Affinity $23
International $200

Source: Lockton Cos.

Note: Table made from pie chart

Lockton's New Leaders Include Julian James

Lockton International, the division formed by Lockton Cos. from the newly purchased Alexander Forbes International Risk Services, is building its leadership. The division created four new executive chairmanships and recruited top executives from other brokers to fill them.

Julian James, director of worldwide markets for Lloyd's, is to leave at the end of April to join Lockton International as executive chairman of its international Operations.

Chris Brown, who was most recently responsible for Marsh's European Risk Management practice, will join the corporate risk-solutions division later this year, and Neff Nimmo, who was most recently chief executive of the UK Finpro operations at Marsh, will join the global professions and financial risks division. Paul Jack, a 28-year industry veteran who was previously a director of JLT Risk Solutions Ltd., joined the international division in January.

James, who has been with Lloyd's since December 1997, had a high profile within the market, promoting the Lloyd's name around the world.

"It's just a great opportunity," James said in a telephone interview in January. "I have been here at Lloyd's for nine years. I felt it was time certainly for me to be looking forward to a new challenge."

The four new posts will be based in London. Lockton described the new executive chairmanships as complementary to the role of Stewart McCulloch, chief executive officer of Lockton International. He and James will provide "an exclusively client- and market-facing emphasis to the most senior position in each business area," Lockton said in a statement.

Last March, James was in the running for the chief executive's job at Lloyd's, but the job went to an outsider, Richard Ward, former chief executive of the International Petroleum Exchange in London. James denied disappointment over the top job played a part in his decision to go. He said the lapse of almost a year between Ward's appointment and his announcement answered that question.

"It's great to be leaving the market when it is in such good shape," James said.

In moving to Lockton, James will be returning to his roots. "I've got a foot in both camps" he said of his time at Lloyd's and the broker Sedgwick, where he spent 15 years.

He spent about five years for Sedgwick in the United States, in New York and Dallas, and set up Sedgwick's U.S. energy practice. Sedgwick was acquired by Marsh in 1998.

James has been energetic in making Lloyd's argument for an end to U.S. reinsurance collateralization rules. He also has spoken regularly of the need for the Insurance market to safeguard its reputation.

--Robert O'Connor and David Dankwa
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Title Annotation:Agent/Broker
Author:Dankwa, David
Publication:Best's Review
Date:Mar 1, 2007
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