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Taking a cue from 19th Century essayist Ralph Waldo Emerson, property/casualty insurance brokers say they cannot complain of want of opportunity.

That is the case even in these turbulent days for the industry, as a confluence of trends make just surviving-let alone thriving-a tougher challenge than it has been in the past decade.


In the tidal wave of mergers and acquisitions that have swept over many of the world's largest brokers, big, strong competitors have become leviathans.

Brokers that have not waded into mergers and acquisitions or only have obtained small agencies have not adequately buoyed revenues to spread over the huge cost of improving their computer systems without hurting earnings per share. Improving those systems is crucial for many brokers if they hope to compete more efficiently and effectively, industry observers agree.

Brokers do not have much additional retail business to win. Because of the soft market and the increasing popularity of alternative risk financing mechanisms, annual gross premiums written by U.S. insurers over the past few years have grown at a skimpy rate of about 3%, according to A.M. Best Co. Plus, risk managers' increasing demands for fee-based services are further squeezing brokers' revenues.

Still, executive after executive interviewed for Business Insurance's annual profiles of the world's largest brokers dwelled on the opportunities-not the challenges-that industry consolidation has proffered.

They view consolidation as a destabilizing force that will shake loose business on which they previously had no opportunity to bid. Executives at smaller, national boutique brokers say they are anxious to show off service capabilities that many risk managers never thought the brokers had.

These brokers also expect to be able to pick up some talented executives who either are squeezed out by the megadeals or who decide they do not want to toe the line at a large corporation.

For their part, the brokers involved in the megamergers point to instantaneous massive revenue gains and the deeper and richer service capabilities they now can offer clients.

Add to that the intention of many large and mid-market brokers to integrate their traditional services with new financial products so the brokers can become one-stop financial services shops for risk managers and the future holds great promise, broker executives say.

"The reality is that the face of the retail brokerage business is changing," observed John Wicher, managing director of San Francisco-based investment bank Russell Miller Corporate Finance Inc., which has played a role in several brokerage consolidations.

"The insurance policy is one of only several solutions" for risk managers these days, he said. Brokers that can adapt to this new environment can provide good rates of return on shareholders' investments, he said.

Some industry observers, though, say brokers' shareholders-not risk managers-stand to reap far bigger gains in the industry's metamorphosis.

To put the consolidation into perspective, one needs to look back only to last year's list of the world's largest brokers. Five of the Top 20 have been consumed in mergers and acquisitions.

Looking back to the beginning of the decade, half of the Top 20 are gone today. Seven were gobbled up by Aon Corp. after it acquired Rollins Burdick Hunter Group Inc., which ultimately was renamed Aon Group Inc.

As a result of broker consolidation, the combined $9.42 billion of 1996 gross revenues reported by Aon's brokerage subsidiary and the world's largest broker, Marsh & McLennan Cos. Inc., represents 89% of the total revenues that the world's Top 20 brokers reported in 1990. M&M's and Aon's 1996 revenues alone exceed the Top 20's 1989 total revenue by $300 million.

And, the combined 1996 revenues of the 10 largest brokers-$13.91 billion-fall only about $216 million, or 1.5%, shy of the 1995 revenues for the entire Top 20 brokers.

Given the sea change in the industry's makeup, Business Insurance this year ranks and profiles the world's Top 10 brokers.

On the strength of the torrid consolidation pace, the 1996 pro forma revenues for the Top 10 soared 37.7% compared with their 1995 revenues, which do not reflect the companies' recent mergers and acquisitions.

Likewise, the brokers' employee count soared 30.4% last year. Revenue per employee increased 5.6% to almost $123,700 in 1996 from about $117,000.

Still, three brokers reported single-digit revenue gains.

And two brokers, Acordia Inc. and C.E. Heath P.L.C., reported lower revenues, down 38.1% and 24.4%, respectively, as a result of separating themselves from operations they held in 1995. If just ongoing operations are compared, though, the brokers' revenues increased from 1995.

For the 219 agents and brokers-including the world's Top 10-listed in this year's directory, gross revenues in 1996 increased 22% to $17.9 billion from nearly $14.7 the year before. The revenues for both 1996 and 1995 reflect mergers and acquisitions.

Revenues per employee for that group increased 3.1% to $119,670 in 1996 from $116,028.

Meanwhile, the business enterprise value of brokers, stated as a multiple of earnings, dipped last year to 1.36 from 1.42 in 1995 for public brokers and to 1.22 from 1.25 for privately held brokers, according to Russell Miller. The firm defines business enterprise value as the sum of market capitalization and debt.

So far this year, public brokers' values have rebounded.

Now buried in the reshaped broker landscape are many of the once-familiar broker abbreviations that gave rise to the "alphabet house" moniker for the whole group of top brokers.

Those companies and the surviving brokerage giants expanded from regional companies to intermediaries of national prominence in the late 1960s and the 1970s by utilizing their own inflated stock prices in a superheated stock market to acquire local brokers in cities where the regionals were not represented.

Aon's Patrick G. Ryan, one of the leading architects of the current broker consolidation of international brokerages, says today's deals are reactions to insurance buyers' demands for more services, including investment advice. "The reason you get consolidation is because the end user demands it," said Mr. Ryan, chairman and chief executive officer of Aon Group and its parent.

Many observers, though, disagree.

"I think that's a small part of it," said Bill Weiland, managing director of Hales Capital Advisors L.L.C., an Oak Park, Ill.-based agency business consultant. "If a risk manager is demanding expertise from a broker, the broker can get it cheaper than through a major acquisition."

Most observers agreed that boosting revenue to give brokers a chance to bolster earnings per share is the driving force behind consolidation.

Without those deals and the development of new products, broker revenues "can't keep pace with the cost side," said Russell Miller's Mr. Wicher. "You build shareholder value by spreading cost across a broader revenue base. It's the only path A&A saw for building value for shareholders," he said, referring to the decision by Alexander & Alexander Services Inc. executives earlier this year to sell the broker to Aon.

Brokers tell analysts that consolidation can cut operating expenses for a newly combined company 5% to 8%, said stock analyst Jay Cohen, a vp with Merrill Lynch & Co. of New York.

"That can be pretty significant," he said. "It's not as dramatic as in some industries, but there certainly are opportunities" to shave expenses.

New revenues from consolidation also can better absorb some significant new costs that brokers may need to incur to remain competitive.

For example, "buyers are increasingly global," which means brokers have to enter some new markets-like Asia-to service multinational clients, Mr. Cohen observed.

Consolidation can give one or more partners in a newly combined company access to a previously untapped market. Otherwise, "it would take a long time to build those markets from scratch," he said.

M&M's acquisition of Johnson & Higgins, which was building a strong Asian presence, immediately gives M&M "one of the strongest groups in that important emerging market," said Russell R. Miller, chairman of the investment bank.

Technology costs are another driving factor in consolidations.

Brokers must ensure a high level of service in areas such as underwriting and claims information and client communication "to gain and hold market share," said risk management consultant Richard Betterley, president of Betterley Risk Consultants Inc. of Sterling, Mass.

But brokers' technology to support these services typically is inadequate, industry observers agree.

"In general, the insurance brokerage industry has lagged behind the world in developing information systems," said Mr. Weiland, the agency consultant.

"There is so much (productivity) waste in the brokerage industry" because of its outdated technology, said Lisa C. Arsenault, who heads Etobicoke, Ontario-based IMC Strategic Development, an insurance and risk management industry marketing communications consulting firm. Ms. Arsenault's resume lists positions in the systems departments of M&M's and J&H's Canadian operations from 1988 through 1995.

"It's actually the smaller brokers that have more technological expertise," she said.

Technology enhancement was one of the issues in the M&M and J&H deal, Mr. Weiland said. J&H needed capital for a system, and M&M had it, he said.

And, as it did when regional brokers expanded nationally, the "phenomenal stock market" is playing an important role in broker consolidation, said John Ward, CEO of Ward Financial Group, a Cincinnati-based management consultant. "It induces more merger and acquisition activity because your stock can buy more."

In sum, with the exception of stock prices, broker consolidation "is being driven by weaknesses, not strengths," observed Bernard H. Mizel, chairman and CEO of USI Insurance Services Corp., the seventh-largest broker of U.S. business.

But, does broker consolidation offer risk managers as much as the industry's expansion did a generation ago?

Brokers-from those with billions of dollars of revenue to mid-market intermediaries that are a fraction of that size-see many opportunities to both enhance their capabilities and beef up their business.

Because consolidation has winnowed the largest brokers' competition, so-called second-tier, or smaller, national boutique brokers, expect they will get their first look from many risk managers intent on fostering broker competition.

Judy Lindenmayer, vp-Fidelity insurance and risk management at Boston-based FMR Corp., agreed. Many risk managers do not want to count on a single broker for research, market trends and expertise in a given area, she said. Before the consolidation this year, she had used separate brokers: M&M, J&H and Aon.

Mr. Weiland, the agency consultant, predicted that risk managers will find they have overlooked some expertise at second-tier brokers. Those companies also have been active, without as much fanfare, in acquiring brokers in much smaller deals that have added to the acquiring company's expertise, he said.

For example, fifth-ranked Arthur J. Gallagher & Co. has picked up accounts "that have not been happy with the consolidation, that have said, 'I chose not to be with X broker or Y broker-I'm not going to let them just buy my business,'*" said J. Patrick Gallagher Jr., president and CEO.

Executives at smaller, national brokers also expect to get a closer look from Fortune 1,000 company risk managers if a consolidation squeezes out their account managers with their current brokers.

Tom Harvey, president and CEO of Assurex International, a network of 89 mid-sized brokers, said he already is seeing this among Assurex members. Assurex comprises 59 U.S. and eight Canadian brokers, which are full shareholders, as well as 25 international affiliate members in as many countries.

Mr. Weiland predicts that risk managers at large companies will split their business between large and smaller, national brokers, particularly for specialty exposures.

A "good example" is directors and officers liability insurance, he said. Some smaller, boutique brokers can arrange coverage with particularly favorable policy forms and provide special expertise in claims administration, Mr. Weiland said.

And, many second-tier brokers can provide services such as loss prevention, claims consulting, alternative risk financing and risk management information system consulting that equal those large brokers offer, Assurex's Mr. Harvey asserted.

"The second tier is still a viable option for risk managers," agreed Kevin M. Quinley, senior vp-risk services for MEDMARC Mutual Insurance Co. of Fairfax, Va. Mr. Quinley said he uses brokers for certain services rather than to place coverage.

One executive of a smaller, national broker, though, said boutique firms "have to be very clear about what we can and can't do." That way, risk managers "can take advantage of us for something we know how to do, and we're not wasting their time where we can't be a help," said Andrew Rogal, president and CEO of Hilb, Rogal & Hamilton Co., the eighth-largest brokerage of U.S. business.

Many brokers expect to bolster their expertise by picking up executives who are forced out from or decide to leave the largest national brokers in the wake of the consolidations. For example, Sedgwick Group P.L.C., Willis Corroon Group P.L.C. and Gallagher report they have landed producers from other brokerages as a result of consolidation.

Many second-tier broker executives expect they will attract a large share of the dislocated producers.

The smaller, national boutique brokerages' "more entrepreneurial and less political environments will attract some very good professional people, who'll bring skill sets and contacts," said Michael Segal, president and chief executive officer of Chicago-based Near North Insurance Brokerage Inc., the 15th largest broker of U.S. business.

And, the risk managers will follow, brokers say.

Ms. Lindenmayer agrees. "You can have two or 20 mergers. At the end of the day, this is a people business," and she would follow account managers to smaller, national brokers.

"We chose brokerage houses based on where we thought the people were who could get the job done," she explained.

A new low-interest loan program that Assurex announced late last month could facilitate some of that producer movement to second-tier brokers. Assurex members can use the loans to hire experienced executives who would be suitable for an ownership stake in their companies within five years. The loans are ideal for hiring former executives from large brokers, but they also can be used to hire executives to shore up other service segments of the brokers' operations, Mr. Harvey said.

Some observers also expect that additional account churning could be triggered if brokerages that are busy integrating their new acquisitions lose their client focus.

Ms. Lindenmayer, for example, complained that one of the brokers in the M&M/J&H deal was slow in informing her about how the deal would affect her account teams. The broker, which she would not identify, has since given her some feedback. Still, "I am not sure I understand as much as I need to know about it," she said.

Ms. Lindenmayer is taking a "wait and see attitude" for now, because she does not think the two brokers have had enough time to fully integrate.

While there may be some account churning as a result of industry consolidation, other observers do not expect Fortune 1,000 risk managers to look beyond the four or six largest brokers.

For risk managers at the largest companies, four large brokers provide plenty of competition, said Mr. Betterley, the risk management consultant. Risk managers "won't get bids from four brokers-probably two and maybe three. But not four," he said.

Services are not as deep at second-tier brokers, he said.

The movement of producers from large brokers will not be a significant boon to second-tier companies, asserted Mr. Wicher of Russell Miller. Producer movement already is common in the industry, though many producers are handcuffed by non-compete agreements with their former companies, he said.

In addition, those producers will not be as effective at second-tier companies, Mr. Miller said. "If I'm a chef in a (Parisian) restaurant and I leave to become a chef at McDonald's, I don't have the same capabilities. I can't put out the same product."

USI's Mr. Mizel also expects risk managers at the largest companies to limit their options to the six largest brokers, which is fine with him. While USI has several very large international accounts, its primary focus is middle-market companies with 500 to 750 employees.

With its many acquisitions and its strategy of providing financial services as well as retail brokerage in an integrated approach to mid-sized companies, 3-year-old USI last year swelled its gross revenues 108% to $163.3 million from $78.4 million the year before.

Rather than Fortune 1,000 company risk managers turning to second-tier brokers, the more likely scenario after industry consolidation would be large brokers seriously courting companies in the fast-growing mid-market segment of the economy, Mr. Mizel said.

Risk managers may have to wait a while before they will be able to see the industry's new face, because it is up for some additional makeover.

Broker executives say that the current round of consolidation has opened up more acquisition opportunities with companies fearful of being left behind in a market in which they no longer can compete.

Another megamerger is not out of the realm of possibility. Analysts and other market observers continue to speculate about whether Sedgwick and Willis will combine with each other, and executives at both companies do not rule out the possibility. But, some analysts, including Mr. Miller, say Sedgwick in particular can compete adequately with the other large brokers even without making such a deal.

A twist in this trend is unfolding at Acordia and Heath, both of which are planing management buyouts, though for different reasons.

Acordia's major investor, Anthem Insurance Cos. Inc., has decided to focus exclusively on health care. Heath's management wants to implement an administrative and processing overhaul that presents risks that management says would be too difficult for the broker to undertake as a publicly traded company.

Meanwhile, brokers are trying to sort out their disrupted networking relationships with foreign intermediaries.

Industry consolidation has shattered the ExcelNet network. Acordia is the lone surviving member of that network.

The UNISON network lost its U.S. anchor when J&H was acquired by M&M.