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The little-changed lineup of the world's 10 largest property/casualty insurance brokers belies the industry's ongoing metamorphosis and the uneasiness it is brewing in the risk management community.

Nine of this year's Top 10 brokers are holdovers from last year's rankings, and the seven largest brokers maintained the positions they held a year ago.

But the narrowing gap between Marsh & McLennan Cos. Inc. and Aon Corp. for the top spot and a huge surge in brokerage revenues for the Top 10 in an increasingly competitive market reflects the consolidation that is continuing throughout the industry at a fervent pace.

Blockbuster deals -- acquisitions of brokers with at least $100 million of brokerage revenue -- have faded, at least for a while. But brokers in the past year still made many significant acquisitions, both internationally and domestically, industry analysts say.

Some analysts and broker executives say the industry shakeup is creating financially stronger brokers that are providing risk managers with better products and services and more creative solutions.

Patrick G. Ryan, chairman and chief executive officer of Chicago-based Aon, cited the availability of multiyear policies, integrated policies and other new and creative products as the fruit of consolidation "both on the capital side and on the service side."

"There is just not a big sign out there that says, 'This is as a result of consolidation.' One cannot lose sight of the fact that never have buyers had it better," he said.

Some industry analysts, though, said many of those developments had been occurring before industry consolidation kicked into high gear.

In any case, those analysts and some risk managers say they have not seen the promised benefits, including greater access to more experts and enhanced technological capabilities, from the most recent round of consolidations.

"At this time, the typical risk manager has a lot of questions and skepticism about how they'll be impacted by all of these deals," said John Ward, CEO of Ward Financial Group, a Cincinnati-based management consultant.

One thing risk managers can be certain about is that industry consolidation will persist, even as brokers continue integrating the operations and cultures of recent acquisitions.

Besides the unrelenting soft insurance market, brokers face growing competition for business from, among others, capital markets and reinsurers that are offering alternative risk-financing products directly to risk managers and from insurers doing business over the Internet.

In addition, over the past several years, insurers have sliced brokers' commission rates from the high teens to single digits.

All of that leaves brokers in a hard place for growing revenues.

The rock for brokerage executives is that shareholders still demand enhanced stock values, which are driven by increased revenues and earnings.

Mergers and acquisitions are brokers' quickest routes to improving shareholder value, said Ken Crerar, president of the Council of Insurance Agents & Brokers in Washington.

That strategy helped the world's 10 largest brokers in 1997 rack up more than $13 billion in brokerage revenues, a robust 38.8% gain from $9.38 billion in 1996. However, six of the Top 10 reported only single-digit increases in brokerage revenue.

The remaining 182 brokers listed in this year's directory did not fare as well as all of the Top 10. As a group, the remaining brokers' brokerage revenue gains outstripped many of the largest brokers' individual revenue increases. The 182 brokers' aggregate revenues rose 11.9% to $3.67 billion in 1997.

Broker management has accomplished its objectives of fueling growth and profit margins, which has built up a base over which they can more easily apply some necessary new costs, especially for updated technology, said Bill Weiland, managing director of broker consultant Hales Capital Advisors L.L.C. in Oak Park, Ill.

Consolidation also has allowed brokers to increase their expertise in various areas, he said.

"I don't see this thing slowing down at all," Mr. Crerar said. "Look at the non-U.S. acquisitions by the globals. It's an integration period, yes, but no one is sitting on their laurels."

Global brokers are intent on expanding their overseas presence.

"Internationally, some very important deals have taken place," even if they do not fall into the blockbuster category, said John Wicher, managing director of Russell Miller Corporate Finance Inc., a San Francisco-based insurance industry specialty investment bank.

Many of the global brokers' targets had been members of the unraveled UNISON network. M&M has purchased six former UNISON members. Aon has bought three former UNISON members that were the largest brokers in Germany, Norway and Spain.

Among other significant acquisitions of overseas brokers, Willis Corroon Group P.L.C. of London has acquired stakes in leading Danish, French, German and Italian brokers.

All of those acquired brokers have recognized that if they want to be global brokers, "they don't have a large enough capital base to do it on their own," said Russell R. Miller, chairman of Russell Miller Corporate Finance.

The consolidation pace domestically also will not slow soon, according to many analysts and broker executives.

Aon will more or less continue on the acquisition course that has taken it from a distant No. 7 ranking in 1990 to challenging M&M for the top spot. But probably not all of its future acquisitions will be retail brokers. Some will be consulting and service firms, Mr. Ryan said.

Other brokers have similar ideas. For example, two of Arthur J. Gallagher & Co.'s three acquisitions last year were benefit consultants.

Some smaller national and regional U.S. brokers are just as active consolidators. They are picking up local brokers that will help build or shore up specialty niches or fill geographic voids domestically, according to industry analysts. To service clients with international needs, those brokers are relying on overseas networks.

But, unlike a generation ago, such smaller broker deals typically are not designed to vault the brokers into companies of national prominence, said stock analyst Jay Cohen, a vp with Merrill Lynch & Co. of New York. Today's deals are relatively smaller and more selective, he said.

Even so, the growth of revenues and earnings is a driving force behind those deals as well, asserted middle-market broker management consultant Paul B. Medini. "I think it's hard for them to maintain any type of growth without doing a merger," said Mr. Medini, a partner in the insurance industry practice of Pricewaterhouse-Coopers L.L.P. in New York.

Bernard H. Mizel, chairman and CEO of USI Insurance Services Corp., unabashedly speaks about his efforts to grow USI through acquisitions.

Even though it is targeting middle-market companies, the 4-year-old USI already has become the world's 11th-largest broker, largely on the strength of its 72 acquisitions through 1997. Mr. Mizel said middle-market companies comprise a vast untapped market segment for USI's product offerings: a combination of retail brokerage and the same level of financial services that traditionally has been available only to large companies.

Mr. Ward, the management consultant, expects that consolidation among primary insurers that depend on agents and brokers also will foster additional broker consolidation. He said agents and brokers that had serviced the weaker of the two insurers might feel compelled to seek a strong partner if they find their own market positions diminished after the insurer consolidation.

Industry consolidation continues to drive up the business enterprise values of publicly held brokers, but the value of private brokers continues to slide, according to Russell Miller Corporate Finance. The investment bank defines the value, expressed as a multiple of revenue, as the sum of market capitalization and debt.

The value for public brokers, which typically are larger companies, jumped to 1.73 in 1997 from 1.44 a year earlier. It has risen from 1.36 in 1993 because public brokers have been able both to grow revenues through acquisitions and to increase their efficiency, Mr. Wicher said.

For private brokers, typically middle-market companies, the value in 1997 fell for the third consecutive year. At 1.19, it reached its lowest mark since the investment bank began calculating the values in 1985.

The value of private brokers has fallen largely because the soft market and a lack of product differentiation are pinching their revenues, Mr. Wicher said.

But a middle-market broker representative said those companies are doing fine and have no desire to play a role in industry consolidation.

Assurex International's 60 U.S. and Canadian partners and 32 overseas affiliate members have, on average, grown their revenues 11% annually for the last five years, according to Tom Harvey, president and CEO of the Columbus, Ohio-based network of largely privately owned brokers. "That's significantly above a vast majority" of the revenue increases reported by global brokers, he observed.

The Assurex network's revenue growth largely has resulted from new products and services, particularly those that are benefits-related; new business; and the retention of clients that are building up their business both domestically and internationally, Mr. Harvey said.

Among Assurex's U.S. and Canadian members, only 15% were involved in mergers and acquisitions last year, and most plan to remain independent, he said.

As privately owned companies, Assurex members do not have to worry as much as public brokers do about boosting earnings quarter to quarter, Mr. Harvey said.

He said the internal disruptions that brokers create by continually acquiring other firms to drive up earnings "ricochet" back to clients.

The result is that some clients of large brokers are beginning to ask Assurex members to bid for their accounts.

"When your growth strategy is keyed on acquisitions, I want you as a competitor," Mr. Harvey said.

Some risk managers are openly displeased with how consolidation has affected them. One complaint is that none of the promised enhanced products and services have materialized.

Sue Anne Mitro, manager-risk and insurance for The Hillman Co., a highly diversified holding company based in Pittsburgh, recently prepared a presentation for Hillman's board on how broker industry consolidation has benefited the company. Hillman had placed its coverage through Johnson & Higgins before M&M acquired J&H last year. Hillman remained with the consolidated broker, J&H Marsh & McLennan Inc.

"I couldn't think of a single promised enhancement or benefit" that has been delivered, she said.

Among the promises made were that she would have access to more experts and that the consolidated broker's technological capabilities would be enhanced.

But, said Ms. Mitro, whose casualty team "was wiped out" in the consolidation, she has had difficulty finding the experts she needs. She said she is "determined to find" those centers of excellence at J&H Marsh & McLennan on her own, even if that means not using the broker's local office to place Hillman's coverage.

Another J&H Marsh & McLennan client, Judy M. Lindenmayer, also said she has not seen any of the benefits that she expected. Unlike with Ms. Mitro, the broker did not make any promises, said Ms. Lindenmayer, vp-Fidelity insurance and risk management at Boston-based FMR Corp., better known as Fidelity Investments. Even so, she said, she expected to see the broker's "talent pool enhanced" and a greater focus on technology.

But Ms. Lindenmayer's account team has not changed materially since the two brokers combined. She said she ensured that by asking M&M as soon as she heard about the deal to leave her teams intact.

Brokers, though, may not have had enough time to deliver their promised product and service enhancements, observed Risk & Insurance Management Society Inc. President Mark A. DeLillo.

While financial services management consultant Mike McKeon said brokers have strengthened their talent pools, he agreed that they have made only "limited progress" in improving the technological tools they could offer risk managers to aid them with, for example, modeling and decision-making.

Noting that "well-run companies can only focus on so many things at one time," he said brokers have been focusing on reducing costs in an effort to enhance shareholder value.

That effort also concerns risk managers, noted Mr. DeLillo, vp-risk management at Celotex Corp. in Tampa, Fla. "Are they focusing on efficiency or cost cutting? There is a difference."

Brokers largely have eliminated their redundant costs, said Mr. McKeon, a partner in the financial services sector of Booz-Allen & Hamilton Inc. of New York. But they still are a long way from reshaping their global companies into models that can efficiently deliver the various products and services their different client segments need, he said.

More troubling to risk managers than not seeing promised product and service enhancements is dealing with distracted account managers and a decline in service. Some risk managers complain, and some brokerage executives concede, that brokers' focus on clients has blurred as the brokers have concentrated on integrating recent acquisitions.

Richard Betterley, president of Betterley Risk Consultants in Sterling, Mass., said clients have pointed out to him that their broker account executives are distracted.

"Who needs it? The client has enough to worry about without worrying about someone else's emotions," Mr. Betterley said.

John T. Sinnott, CEO of J&H Marsh & McLennan, acknowledged that the process of integrating J&H and M&M was "a distraction" at the brokerage in 1997. "But I think those issues are basically behind us," he said.

Senior executives at London-based Lambert Fenchurch Group P.L.C. also were "inevitably" distracted when Lowndes Lambert Group Holdings P.L.C. and Fenchurch P.L.C. merged last year, said CEO David Margrett.

While those distractions have not hurt the brokerage's performance, Lambert Fenchurch will be more client-focused in the year ahead, Mr. Margrett vowed. He added that he expects the same from his competitors.

Most distractions for brokers following a merger or acquisition are due to cultural issues that shift broker management's attention away from daily work requirements to non-productive activities, explained Tim Cunningham, a principal in Chicago with INSIGHT Consuting Group, a Kansas City, Mo.-based financial services consulting firm.

While the brokers still serve clients reasonably well, "maybe some things are falling through the cracks," he said.

But "mostly it affects their ability to attract new business," he said.

Mr. Crerar of the CIAB called the loss of client focus the "biggest management challenge" for brokers. But it usually is "only a temporary fallout of mergers," he said. "I'm not sure it's a critical issue."

Mr. DeLillo of RIMS disagreed. "I don't think that should ever happen. It's unacceptable. All it is is a service industry."

Industry analysts and risk managers also noted that some high-quality broker account managers and technical representatives either have been axed or have left their firms in frustration in the wake of industry consolidation. Many have landed with middle-market brokers, which often offer executives ownership opportunities within five years, they said.

For example, over the past 18 months, Kaye Group Inc. of New York has picked up five account executives who left much bigger firms following their mergers and acquisitions, said Bruce D. Guthart, Kaye's chairman, president and CEO. The account executives run the middle-market broker's new environmental, international and energy specialty divisions.

However, account manager movement in total has not been much different from in the past, industry analysts agreed.

Despite all of those concerns, not many risk managers have changed brokers.

"Because of the softness of the market, risk managers are not forced to make a decision" this soon, Mr. Guthart said.

Fidelity's Ms. Lindenmayer has a different perspective. Referring to the broker quality score card that RIMS and the Quality Insurance Congress developed and published this spring (BI, May 4), she said, "I don't appear to have a big choice right now."

One risk manager who has switched brokers is Microsoft Corp.'s Scott K. Lange; he moved the computer software giant's account to Aon from J&H Marsh & McLennan last fall (BI, Nov. 17, 1997).

Robert J. Newhouse III, president of J&H Marsh & McLennan (Americas), said Microsoft's departure had nothing to do with the J&H acquisition.

Mr. Lange, director of risk management at Microsoft, disagreed. He explained he already had been having problems with the Seattle office of J&H when M&M acquired the broker. Various attempts to fix the relationship did not work. Mr. Lange said M&M's acquisition of J&H and the loss of client focus that followed "was bad timing for all of this" and prompted the change in brokers.

Of course, many other risk managers have not experienced problems with their brokers.

"I get what I need from my brokers," said Brian D. Casey, director-risk management and loss prevention with Corning Inc. of Corning, N.Y. Mr. Casey uses both J&H Marsh & McLennan and Aon.

And, Mr. DeLillo, who places coverage through Aon, said his broker service has improved.

But many risk managers are fretting over whether consolidation has led to too few choices of brokers with too much influence over insurers.

Insurers are concerned, too, said Kaye's Mr. Guthart. Insurers are "spending more time" with middle-market brokers to ensure that a broader distribution system survives.

Mr. Crerar summed up the broker industry's consolidation on a pragmatic note. "Whether you like it or not, it's happening," and it is driven by brokers' need for added profitability and reduced expenses.

"Of course, client service has to be brokers' main concern. If the client doesn't like it, they can walk," he said. "At the end of the day, the market will tell whether the buyer is getting what it wants.'