Alexander & Alexander Services Inc.
Alexander & Alexander Services Inc.
Incorporated: 1922 as Alexander & Alexander, Inc.
Sales: $1.34 billion
Stock Exchanges: New York
SICs: 6411 Insurance Agents, Brokers & Service; 8742 Management Consulting Services; 6719 Holding Companies Nee
Alexander & Alexander Services Inc. (A&A) is the second largest insurance brokerage company, and the largest retail insurance broker, in the world. Through a network of subsidiaries and affiliates, A&A acts as intermediary between clients (usually corporations) and insurance underwriters, receiving a commission based on the premium paid by the client. A&A also offers a variety of risk management consulting services, including loss control and cost studies. Through its Alexander Howden Intermediaries subsidiary, A&A specializes in insurance packages for events and institutions with large, complex risk situations. Another A&A unit, Alexander Howden Reinsurance Brokers Limited, is one of the leading reinsurance brokering companies operating in the London and international markets. In addition, through its Alexander Consulting Group, -Inc. (ACG), A&A is engaged in the human resources consulting business, designing employee benefit packages and providing retirement program planning and actuarial services for over 20,000 clients. A truly global organization, A&A operates over 300 offices located in over 80 countries.
Alexander & Alexander was founded as a partnership, late in the nineteenth century, for providing companies with insurance policies. By 1910, the company’s client list included Wagons-Lits, the Paris based operator of train coaches, including those of the renowned Orient Express. In 1922, the company began providing services for the Sun Company, which had recently opened its first gas station. After a couple decades of healthy growth, the company was incorporated in Maryland in 1922. A&A’s modest but steady growth lead to the expansion of its operations in Canada in the 1940s. The company’s personnel management consulting business was also growing strong by the 1950s, and, in 1958, specialty chemical and health care product manufacturer W.R. Grace & Co. came on board as a consulting client.
A&A grew into an international giant in the insurance industry during the 1960s. In 1966, having earned $742,000 on revenue of $13.6 million, the company embarked on an acquisition spree. Over the next five years, A&A acquired 42 insurance brokerages and agencies, one actuarial consulting firm, and a risk analysis and consulting firm. By 1969, the company’s revenues were up to $34.5 million, and net income had nearly tripled to over $2 million. A&A’s expansion was part of an industrywide trend that saw the total number of insurance brokerage houses drop dramatically as the larger outfits overtook smaller ones and went public. A&A’s initial offering came in April 1969, with its stock opening at $26 a share. By the end of the decade, A&A was operating 23 offices in the United States, five in Canada, and one in Paris. Insurance brokering was generating about three-fourths of the company’s revenue. A&A was also operating two subsidiaries: Alexander & Alexander Securities Dealers, Inc. and Benefacts, Inc., which provided employees of client companies information about their group coverage.
A&A’s rapid expansion continued into the 1970s, as the company launched a major offensive in the battle to become the first international insurance supermarket. In 1971, the company established a network of eight subsidiaries across Europe. The eight companies, each joint ventures with established European brokerages, included Alexander-Berkeow Mendes (Netherlands), Alexander-Havag (Germany), Alexander-Menage & Jowa (Belgium), Alexander-Bouly (France), Alexander-Pratolongo (Italy), Alexander-Coyle Hamilton (Ireland), Alexander-Sedgwick Services, Ltd. (England), and Alexander-Gonzales (Spain).
In 1973, Alexander & Alexander Services Inc. was created as a holding company for A&A Inc. and its various subsidiaries. By that time, A&A had over 2,000 employees, and its headquarters had been moved from Baltimore to New York. That year, eight new firms with a combined $3.7 million in annual revenue were merged into the company, bringing the total number acquired since 1969 to 69 (65 of them insurance brokerage and agency operations). More acquisitions came the following year. Utica Mutual Assoc.; Lewis M. Gabbe & Co.; and Barton, Curie & McLaren, Inc. were all purchased during 1974. 1975’s buying binge included Shand, Morahan & Co., an insurance underwriting management firm; Houston’s ECCO General Agency, Inc.; and Great Northeast Agency, Inc., based in Long Island, New York.
By the middle of the 1970s, management at A&A felt it necessary to began searching for a British partner. Meanwhile, the company continued to grow domestically through acquisitions. In 1976, A&A acquired Eastern Brokerage Co. in a stock deal. Herman C. Wolff Co., Inc., one of the oldest agencies in Indianapolis, was also merged into the company that year. 1978 was a huge year for acquisitions, which included Anchor Agency, Inc.; Property Tax Services, Inc.; American Risk Management, Inc.; John B. Meyer; Francis S. Carnes, Inc.; May & Son Brokerage Corp.; Boland Insurance Agency, Inc.; and at least eight other firms. By the end of the decade, A&A was leading the industry in return on equity, at over 30 percent. The precision with which the company chose its acquisition targets was regarded as remarkable.
A&A’s first choice for a major merger in England was the highly regarded Sedgwick Group, Lloyd’s of London’s largest broker. Two and a half years were spent exploring merger possibilities between the two companies. Despite these efforts, the idea was abandoned in July 1981. In the United States, however, the company maintained the pace of its expansion. R.B. Jones Corp. was acquired for stock in 1979, and other companies were added in 1980.
The failure to pull off the Sedgwick merger left A&A was anxious to find an alternative partner and make up for lost time. However, a period of industry weakness, ill-timed decisions, and bad luck ensued for A&A. In January 1982, A&A purchased Alexander Howden Group in a $300 million takeover deal. A&A had discussed merging with Howden—Lloyd’s fourth largest broker and largest underwriter—twice in the past, and the two companies had already entered into a joint underwriting venture in Bermuda. To A&A chairperson and chief executive John Bogardus, Jr., Howden seemed the logical second choice for a merger. Unfortunately for Bogardus and A&A, however, the deal was laced with apparent fraud, saddling A&A with devastating losses that would take years to overcome.
Shortly after the purchase of Howden, some $50 million in Howden assets turned up missing, allegedly embezzled. Some of the assets seemed to have been diverted to corporations based in Panama and Liechtenstein. A&A’s initial plan was to simply write off the loss as goodwill over 40 years. However, the Securities and Exchange Commission (SEC) deemed that accounting tactic unacceptable, and the company was forced to take a $40 million charge against profits for 1982, resulting in a net loss of $14.4 million for the year. The deal and subsequent $40 million write-off led to a slew of lawsuits. Moreover, underwriting losses from underreserved Howden units totaled another $185 million. In 1983, still reeling from the Howden affair, A&A eliminated 355 jobs and asked one-fourth of its 7,000 remaining employees to take sizable pay cuts. Bogardus himself, as well as president and chief operating officer Tinsley Irvin, took cuts in salary. Another problem was the blow taken by the company’s reputation. New clients suddenly became scarce, and several important employees jumped ship. Finally, the company’s problems were exacerbated by a generally soft insurance market that saw steep drops in premiums. For 1984, A&A showed a $47 million net loss.
Although preoccupied by the crisis, A&A did not let up in its expansion drive. In November 1982, the company restructured its 88 U.S. offices into three new regional operating groups as part of a more aggressive sales strategy. That year, A&A acquired Clifton & Co. of San Francisco; Banque Du Rhone et de LaTamise, S.A., a Swiss company (later sold); and a minority interest in Industries—Asserkuranz G.m.b.H. & Co. A Boston-based insurance company, OBrion, Russell & Co., was acquired in 1983, and, over the next two years, the company acquired Summit Consulting Inc. of Lakeland, Florida, specialists in workers’ compensation self-insurance programs; Long Island’s American Coverage Inc.; and Reed Stenhouse Companies Ltd., a Canadian retail brokerage.
By 1985 steps were being taken to reverse A&A’s desperate situation. Most of the cases from the Howden fiasco had been resolved by 1986, and, the following year, Irvin became chief executive of A&A. In his first year as CEO, Irvin accelerated the company’s retreat from the highly volatile underwriting business, divesting Sphere Drake Insurance Group P.L.C. and Shand Morahan & Co., the last of its major underwriting affiliates. He chose instead to concentrate on the company’s core brokerage business and its drive for more of an international presence. At the same time, Irvin sought to create a greater sense of unity among the company’s ranks of operating units, a collection of entities resulting from more than 500 acquisitions over the years. Events of 1987 included the opening of offices in Canada, the United Kingdom, and Australia for A&A’s Anistics division, its main risk-management consulting branch. The company’s employee benefits group also crossed the Atlantic during that year. For 1987, A&A reported revenue of $1.1 billion.
The direct costs of the Howden acquisition were all paid off by the end of the decade. Nevertheless, a soft insurance market kept revenues flat during this time, reaching only $1.25 billion in 1989. Of that total, 62 percent was generated by the company’s retail brokerage operations, 8.5 percent by reinsurance brokerage, and 9.3 percent by the Alexander Consulting Group. About 38 percent of revenue came from outside the United States. The Reed Stenhouse unit was particularly active in carrying out A&A’s international expansion.
In 1991, A&A posted a net loss of $ 12.6 million, its first year in the red since 1985. The loss was largely due to a one-time $75 million charge covering the costs of restructuring the company’s brokerage operations, including closing some offices and consolidating others. That year, the company was awarded a $350 million insurance brokerage contract by the government of Kuwait to find marine and war-risk insurance for $500 million worth of cargo to be shipped from all over the world as part of an international relief effort.
Unexpected challenges developed for A&A in the 1990s. The company was forced to set aside reserves to cover an open ended liability for claims against Sphere Drake Insurance Group, once a Howden unit. New legal entanglements seemed to crop up at every turn. In autumn 1993, A&A announced that it had been overstating the revenue of ACG, its consulting operation that had been generating about 16 percent of its earnings. A few days after the announcement, ACG chief executive Angelo D’Alessandro died, having been in a coma for six weeks after falling from an elevated rail system in Mexico City during a business trip. A&A was also stung by the surprise resignation of Ron Forrest, chairperson and CEO of A&A Inc., the company’s U.S. retail brokerage operation.
In January 1994, Irvin resigned as the board’s chairperson and was succeeded by board member Robert Boni. Irvin temporarily retained his position as CEO while an international search was launched for a replacement. On June 7, 1994, A&A named Frank G. Zarb as chairman, CEO, and president. Zarb had been vice chairman and group chief executive of Travelers Inc.
A&A also received a $200 million capital infusion from American International Group, Inc. AIG agreed to invest this sum in a new issue of Series B convertible preferred stock with an eight percent annual dividend. A&A would use a portion of the proceeds of this investment to strengthen its core businesses and finance reinsurance to further insulate the company and its subsidiaries from exposures relating to discontinued underwriting units, primarily those related to the Sphere Drake Insurance Group. Almost immediately, Zarb announced that reinsurance had been arranged.
During A&A’s period of crises, other insurance brokers, particularly Marsh & McLennan, gained a competitive edge. Nevertheless, A&A has managed to overcome many of its difficulties, without help from the insurance market in general, which has remained extremely weak for the better part of a decade. When the insurance industry finally manages to right itself, analysts-suggest, A&A may have the opportunity to produce the kind of results it had shown before 1982, when the Howden scandal made it the perpetrator of what may be one of the worst takeover deals in history.
Alexander & Alexander Inc.; Alexander Insurance Managers Limited; Alexis Inc.; Anistics; Alexander Howden Holdings plc; Alexander Howden Reinsurance Brokers Limited; Alexander Reinsurance Intermediaries, Inc.; Alexander Consulting Group Inc.
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—Robert R. Jacobson