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Integro readjusts to reflect market realities

Broker switches targets after misfired attempt to rival top-tier firms

Integro readjusts to reflect market realities

NEW YORK—After scrapping plans to build from scratch a large-account brokerage on par with Marsh Inc. and Aon Corp., Integro Ltd. has set its sights on being a smaller, multispecialty brokerage.

New York-based Integro made headlines in 2005 when renowned insurance company builder Robert Clements and fellow former Marsh Inc. executives Roger E. Egan and Peter F. Garvey secured $320 million in a private securities placement to launch the large-account brokerage.

Rather than make acquisitions, Integro executives were hoping to build scale by capitalizing on the fallout at the world's largest brokers, which at the time were burdened by investigations into their business practices, class action lawsuits and hefty settlements with state attorneys general over abuse of contingent commissions.

Things looked promising at first as Integro opened several offices and hired scores of experienced executives and producers from its competitors—as well as taking some of their clients. At the end of 2006—its first full year of operation—Integro generated $46 million in gross revenues, including a $10 million fee for its work in conceiving, sponsoring and developing the formation of Hamilton, Bermuda-based Ironshore Inc.

By 2008, however, it became clear that while Marsh, Aon and Willis Group Holdings Ltd. experienced difficulties as a result of industry investigations, clients, for the most part, stayed put.

As a result, “we had to adjust accordingly,” said Mr. Garvey, Integro's founding president, who replaced Mr. Egan as chief executive officer last September.

Mr. Clements remains nonexecutive chairman.

Integro had to shift its business model and cut its costs.

“If we had stuck to the path we were on, we would have had to raise more capital eventually, because we were burning cash to support this large-size platform,” Mr. Garvey said. “Rather than trying to be all things to all people so we could assume any business from clients that did not want to be with one of the big legacy brokers, we adjusted our focus and said, "We are really good in certain specialty areas of complex property/casualty risks—let's focus on those areas,' “ he said.

To support its new model, Integro eliminated roughly 20% of its workforce—or about 70 people—more than half of whom were in corporate back-office positions, Mr. Garvey said.

Today, Integro considers itself a multispecialty brokerage for complex property/casualty risks, with areas of focus that include health care, real estate, high tech, private equity and financial institutions. It's looking to now grow those specialties and new specialty lines organically as well as through selective hires and acquisitions.

“We're certainly not abandoning the organic revenue growth model that we started out on; that's our primary model...but we're looking at a couple of specialty boutiques in North America right now,” Mr. Garvey said. “Thankfully, we're in a healthy enough position now to be able to do those acquisitions without any additional capital.”

With 280 employees and more than $60 million in annual revenues, Integro is a much stronger firm than before the changes, Mr. Garvey said. In the second quarter of 2009, the firm turned its first quarterly profit, and in the first six months it reported 20% organic growth in client revenue, Mr. Garvey said. Executives expect Integro to generate about $67.5 million in gross revenues by year-end. According to Integro, 2008 total revenues were $62.6 million.

“This year, we couldn't be happier with our results,” Mr. Garvey said, noting that Integro has more than 25%—about $80 million—of its original investment capital, no debt and no long-tail liabilities.

“We're very fortunate that we were able to make the adjustments we made last September (before the financial crisis hit), and it looks like it was the right move,” Mr. Garvey said.

Observers say that if there is a lesson to be learned from Integro's experience, it's that large, complex risks don't readily move from one broker to another.

“In looking back, I don't think there were too many people out there at the time who thought it would be a mistake to do what they were doing,” said Kevin P. Donoghue, managing director of Mystic Capital Advisors Group L.L.C. in New York. “History has proved just the opposite, and that says a lot about (Marsh, Aon and Willis) and how really sticky their core assets are to them.”

“The nature of complex risk management business is that it does not move from broker to broker whimsically—it has a very long sales cycle. The institutional knowledge that the incumbent broker, like Marsh, has is very deep,” said Timothy J. Cunningham, a principal with OPTIS Partners L.L.C. in Chicago.

“Integro has a much more viable business model now after retooling and restructuring their operations,” Mr. Cunningham said.

Mark Lane, a principal with William Blair & Co. L.L.C. in Chicago, said he is “not that surprised” that Integro had to revamp its original business strategy. “Aon, Marsh and Willis have great assets and great people and access to resources that Integro could never pretend to have. They are difficult competitors to displace.”