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Alexander Forbes sells international arm in £86mn deal

South African-headquartered broker Alexander Forbes Ltd has reached an £86mn deal with US broker Lockton Companies Inc and private equity firm Stone Point Capital LLC to sell its London-based international arm, Alexander Forbes International Risk Services (AFIRS).

The deal will create the largest independent and privately owned global insurance broker, with revenues topping $600mn – $200mn arriving from AFIRS – and the firm breaking into the top ten globally for the first time.

In a statement to the South African Stock Exchange today (21 August), Alexander Forbes said it “remains committed” to its risk and insurance services in Africa but that, following an extensive review of the strategic options for AFIRS, and the receipt of a number of expressions of interest, it had concluded the transaction “is in the best interests of Alexander Forbes’ shareholders”.

After adjusting for outstanding liabilities, including the subsidiary’s pension deficit and deferred consideration due on a number of its previous acquisitions, the net consideration payable was £67.6mn – significantly less than 1x brokerage revenues. 

The new company – Lockton International Holdings Ltd – will trade under the name Lockton, and continue to be based in London.

Current AFIRS deputy chairman Mike Hammond will take the position of executive chairman in the new company, with AFIRS chief executive Stewart McCulloch appointed chief executive of Lockton.

Total workforce at Lockton following the deal will expand by 1,600 to 3,700, with no job losses expected.

The acquisition is expected to complete in October 2006, subject to regulatory approval.

In a press conference in London this morning, David Lockton, chairman of Kansas-headquartered Lockton Inc, said the deal was driven by “strategic need” and had spawned the first “privately owned entrepreneurial organisation that also has global reach”.

He highlighted the acquisition as an “outstanding fit for our operation overall” and, emphasising a close relationship that had built up between the firms over the last decade, said the deal meant AFIRS is “able to move up the scale”.

Lockton said he believed the merged firm will provide “probably the only credible choice” outside the traditional big three in the sector, Marsh, Aon and Willis.

Hammond added that the “landmark” deal would make it easier to attract and retain staff, as well as enabling expansion into major account market areas, with the ability to service North American business.

And McCulloch stated: “[Today will] propel us not just into the client marketplace, but also the market for talent.”

Despite the firm having been hit by a number of significant defections – particularly in its professions division – McCulloch said it had “come out in rude health”, investing heavily in technology and creating “the right product for the right market”.

The professional indemnity market – one of two sectors in which AFIRS has enjoyed market leadership – has become increasingly competitive.

The key 1 October professional indemnity renewal is likely to see market leaders under increasing pressure, with sources suggesting AFIRS faces a challenge both from former employees, and direct markets, such as Zurich, to sustain its lawyers book of business.

But McCulloch told Insider Week that although a “bit of a scrap” is expected this year, he believes the firm has “the clout” to compete.

He added that, following the deal with Lockton, growth opportunities now exist in the division, with the capability to target major accounts in combination with Lockton’s existing professions business in North America.

The firm has hired thirty new producers in the last six to nine months and, according to McCulloch, is talking to a number of other executives in the market about joining the broker.

AFIRS will have a battle on its hands to match the level of organic growth achieved by its new parent, with Lockton this year generating 19 percent year-on-year growth to go with 95.5 percent client retention rates.

As part of the deal, a proportion of unallocated equity has been reserved for management, which has been set aside as a pool to attract new producer talent to the company.

As revealed by our sister title The Insurance Insider earlier this month, Stone Point has been in discussions with Alexander Forbes over the buy-out of its international operations. Lockton, the world’s tenth largest retail broker, will become the largest owner of the broker with Stone Point taking a significant minority interest.

The sale comes months after Hammond, the former head of Marsh’s UK operations and more recently chief executive of JLT Risk Solutions, joined Alexander Forbes’ International Risk Services arm.

In June, Alexander Forbes confirmed it was itself in discussions with potential private equity buyers of the company and was looking at “strategic initiatives” for its London-based International Risk Services which could include a new investor.

The latest move marks the fourth significant P&C insurance transaction Stone Point has worked on since it was spun-out of the MMC Group last year. Led by Charles “Chuck” Davis – the former MMC vice chairman – Stone Point assisted on the $1.5bn launch of “Class of 2005” Bermudian reinsurer Harbor Point, while founding Mercator Risk Services at the beginning of this year. More recently, it led an investor group that acquired AXA Re’s operations and renamed them Paris Re Holdings Ltd.

From Alexander Forbes’ perspective, the deal provides much needed funds to bolster its balance sheet and continue its repositioning plans, against a backdrop of domestic regulatory trouble over its practice of “bulking” pension funds.

The company’s group chief executive Peter Mayo commented: “We welcome the successful disposal of [AFIRS] to Lockton. It follows an extensive strategic review of our operations, and is a tangible deliverable in our drive to unlock value for shareholders and position Alexander Forbes for the future.

“The transaction benefits us in two ways - first, the proceeds allow us to significantly strengthen our balance sheet by settling interest-bearing debt in the UK and in South Africa and second, at a strategic level, we can now focus our full attention on the plans we have underway for our remaining operations.”

In May Alexander Forbes announced a Rand380mn (£31mn) settlement with South African regulators over its practice of "bulking" pension funds and said the package will reduce its 2005 earnings by 20 percent.

The Johannesburg-headquartered broker said on 25 May that the South African regulator, the Financial Services Board (FSB), is satisfied with its proposal to pay restitution to the affected funds.

An additional Rand100mn (£8.1mn) will be set aside in respect of any historic financial exposure that may arise as a result of a wider review of the company's historical business practices.

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