Alexander Forbes Place

61 Katherine St.,

Sandown 2196, South Africa

27-11-269-0000; fax: 27-11-269-1111

www.alexanderforbes.com

2000 1999

Gross revenues $438,984,000 $369,954,000

Brokerage revenues $385,410,480 $329,158,998

Brokerage: Retail 54% 46%

Wholesale 11% 14%

Reinsurance 1% 1%

Personal 15% 19%

Services 8% 9%

Interest income 1% 2%

Other 10% 9%

Employees 5,307 4,758

Rev./employee $72,623 $69,180

Employee benefits 54% 49%

Offices 61 55

Converted at applicable exchange rates.

Fiscal year ends March 31.

The world's eighth-largest insurance broker has a problem.

Despite Alexander Forbes Ltd.'s rapid expansion and improved profitability in recent years, unless it can raise more money to fund further expansion, the broker faces being taken over by one of its larger rivals.

The problem, notes Graeme Kerrigan, group chief executive of the Johannesburg, South Africa-based broker, is not a lack of potential lenders but rather South African regulations that prevent money raised at home from being exported for acquisitions.

"There's no doubt in my mind...if we can't grow internationally, our (stock) ratings are going to slip, our earnings are going to slip, our price will slip, and Marsh, Aon or Willis will buy us out," he said. But he quickly added that "we're absolutely adamant that's not going to happen."

Alexander Forbes has sufficient funds-about L120 million ($16.4 million)-to maintain its acquisition program for the next 12 to 18 months, explained Quentin Heaney, international development director in London.

Beyond that period, however, Alexander Forbes is mulling its options, Mr. Kerrigan said.

Apart from wanting to ward off any takeover threat, Alexander Forbes would like to maintain its acquisition pace in order to sustain the profitability it has shown since it joined the brokerage big league in 1997 with its takeover of London-based broker Nelson Hurst Ltd. For the fiscal year ended March 31, 2001, Alexander Forbes' pretax profits increased by 27% to 718 million rand ($98.0 million).

Long-term possibilities include finding a backer prepared to lend with an option to take in interest in Alexander Forbes, such as the L100 million ($136.5 million) in offshore funds secured last September through an exchangeable bond to South African diversified company Rembrandt Group Ltd., or identifying companies willing to partner with Alexander Forbes in specific acquisitions, Mr. Kerrigan said.

Alexander Forbes is looking for "a partner who could help develop our business but not be in conflict with us," said John Percy-Davis, London-based deputy chief executive of Alexander Forbes.

For the year ended March 31, Alexander Forbes' gross revenues rose by 33%, to 3.22 billion rand, supported by interest income. That rate of growth fell just short of the 34% reported for the previous year. Because of the strong U.S. dollar, though, in dollar terms the improvement was a more modest 18.7% increase, to $439.0 million. Similarly, in Alexander Forbes' home currency, brokerage revenues rose last year by 31.2% to 2.82 billion rand; in dollars, the increase was 17.1%, to $385.4 million.

As in the last few years, the improvement was fueled by a combination of organic growth and acquisitions.

Mr. Percy-Davis said two-thirds of the revenue gain came from organic growth, while the balance came from acquisitions.

Alexander Forbes' growth-by-acquisition strategy in the last two years has focused largely on the United Kingdom. Last year, the broker's first U.K. acquisition was Johnstone Douglas, a Croydon, England-based employee benefits consultant, as well as 75% of its CTC subsidiary, which is an Internet-based pension administration service.

Mr. Percy-Davis is sanguine about CTC's prospects in light of the U.K. government's stakeholder pension mandate, due to take effect in October. Stakeholder plans, which are low-cost personal retirement savings plans, must be offered by all companies with five or more employees, and the strict limits on charges made by pension providers should increase demand for CTC's third-party administration services, he said.

Other U.K. acquisitions include retail and specialty broker Bradstock Group P.L.C. in London, as well as London-based broker Alfred Blackmore Group Ltd., which specializes in professional indemnity and niche financial services.

Mr. Percy-Davis said the purchase of Alfred Blackmore was well suited to Alexander Forbes' strategy, as it solidified the broker's position as one of the leading professional indemnity brokers in the United Kingdom. Alfred Blackmore broadened Alexander Forbes' geographical reach in that line and bolstered areas such as small accounting firms, surveyors and architects. And, because of growing litigiousness in the United Kingdom, professional indemnity coverage "is potentially a great expansion area," he said.

Alexander Forbes last year also bought a 20% stake in Caerphilly, Wales-based safety, health and environmental risk management consulting firm National Britannia Group Ltd. Mr. Percy-Davis said that acquisition enables Alexander Forbes to use interactive software to help meet clients' needs. Messrs. Heaney and Percy-Davis said the broker hopes to ultimately obtain a controlling stake in that company.

National Britannia offers specialty health, safety and environmental risk management consulting services through an advanced, software-based system to help companies comply with U.K. regulations. Its client base is international and includes companies in the food industry and industries in which asbestos is involved.

"We see this as an interesting opportunity for us, because we're in the risk area with our clients already, and what it does is it allows us to move sideways across the width of the risk spectrum and offer the clients some leading advice and a very deliverable way of dealing with health and safety and environment issues," Mr. Percy-Davis explained.

Mr. Kerrigan noted that the broker is "good at cross-selling.... There's huge opportunity for us to come in and give the client a one-stop shop on both risk and benefits," he said.

Employee benefit business is a strong area for Alexander Forbes, accounting for 54%, or about $237.1 million, of the broker's gross revenues.

Last year, Alexander Forbes also continued its international expansion by setting up a joint venture in Japan with Tokyo-based broker Santei.

In Europe, however, Alexander Forbes is content to be part of a four-broker alliance, Brussels, Belgium-based EOS RISQ N.V. Each broker member-Alexander Forbes; Diot S.A. of Paris; GrECo International A.G. of Vienna, Austria; and J. Van Breda & Co. G.V.C. of Antwerp, Belgium-holds a 25% stake in the venture. The partners have agreed not to encroach on each other's markets, which, in the case of Alexander Forbes, is the United Kingdom. When the four go into new territories in Europe, they do so jointly, Mr. Heaney explained.

Alexander Forbes has no U.S. retail business, and it sees no need for one because it is content with its role as a wholesaler there. Mr. Kerrigan maintains that it is precisely because Alexander Forbes doesn't operate in the United States-while having a significant global presence-that it is so popular with independent agents and brokers in the United States. U.S. wholesale business accounts for about 2.5% of Alexander Forbes' brokerage revenues.

"Alexander Forbes is one of the few companies in the world that can service their international clients, but we don't compete with them back home...I think it's a great positioning, and that's why we're not in a hurry to become an investor" in the United States, Mr. Kerrigan said.

Alexander Forbes' strategy for the next year is to continue looking for acquisitions. The United Kingdom remains its principal focus, followed by Asia and Latin America.

"When it comes to the U.K. market, we look at the medium to small corporate risk, where we don't think they're particularly well serviced by any of the big players," Mr. Kerrigan said. "We also look at niches, such as professional indemnity...there are opportunities to be the best in niches in whatever territory we're in."