Locked Into the Customer

Insurance Journal is pleased to launch a new series of profiles of privately-held property/casualty independent insurance agencies that qualify for the annual Insurance Journal Top 100 P/C Agency listing. What better place to start with than No. 1?

Here’s an idea — instead of operating a business model around various profit centers and shareholder demands, focus the majority of energies on the customer. Build the business with the customer at the center, and operate under the mantra of “Serve the client.”

For Kansas City-based Lockton — No. 1 in the Insurance Journal Top 100 — the customer focus is more than a mantra. It is the company’s mission, goal, business plan and philosophy all rolled into one. It’s the approach the company has taken since 1966, and given Lockton’s phenomenal growth and success, it’s not an approach the company will change any time soon.

The results are impressive: Lockton has become the fastest growing U.S.-based broker for the past 10 years. More impressive is the financial timeline — in every instance, the company grew by nearly 20 percent annually. That’s compounded earnings, too. When others are reorganizing and laying off employees, Lockton is remaining central to its original model and hiring more talent. Lockton has some large competition — Willis Group, Marsh & McLennan, and Aon Corp. to name a few. That this privately-held company is on the same top lists (A.M. Best ranked Lockton number 10 among global brokers in July 2007) as these and other publicly-traded giants speaks to how well the Lockton philosophy has been working.

“Clearly, positioning ourselves over the last 10 years as the only privately-held competitor at the top of the brokerage market to the three largest publicly traded markets has been a crowning achievement to a number of us at Lockton,” says John Lumellaeu, president and CEO of Lockton.

Simple Beginnings

It all started with an answering machine, a file cabinet and a plan. In 1966, Lockton’s founder, the late Jack Lockton, was working as an underwriter for a branch office of a national surety bonding firm. He’d been underwriting surety bonds for a few years when his boss suggested he was well suited to being a broker. That boss also said Jack would be more successful and more satisfied working directly with people. Jack took his boss’ suggestions to heart and soon set up shop with an answering machine and a file cabinet as his staff. He began placing surety bonds for contractors, but it wasn’t long before the business evolved into other areas, such as employee benefits, risk management and health care. That one-man shop has grown into a revenue machine — the company reached nearly $700 million in revenues this past year.

Today, Lockton continues its steady growth. What’s more, the growth is nearly all organic — only one notable acquisition, that of United Kingdom-based Alexander Forbes International Risk Services, has added to the company’s impressive expansion — and it’s expansion that includes 18 U.S. and 26 international offices and 3,825 employees. Such steady, impressive growth results in a business that has more than one strong business component. The company operates under a number of monikers — U.S.-based operations are known as Lockton Cos., international operations are called Lockton International, the affinity products group is known as Lockton Affinity, and the Lockton Financial Services group, to name a few. “Simply put, we are Lockton,” says Dean Davison, the company’s director of communications. Davison’s sentiments are echoed in the way the company, with various groups and divisions, operates as a cohesive unit with a shared vision.

There have been no reorganizations in the company’s 41-year history. There have been no layoffs, either. Maybe it’s the focus on 10 percent margins as they relate to customer needs as opposed to publicly traded companies seeking to earn 30 percent margins that keeps Lockton true to its vision. Perhaps it’s the more than 250 carriers the company does business with. It could even be the focus on middle market and Fortune 1,000 customers. Most likely, it’s a sum of all these parts.

President and CEO Lumellaeu has spent the last 10 years of his career in awe of the way Lockton’s employees and management approach business. What makes this company unique, in his opinion, is a combination of three factors: organic growth, client retention, and employee retention. “Taking care of our people allows us to retain our clients at a much higher rate than our competitors, and if you retain your clients, you have organic growth that allows you to grow like a weed.” It’s what Lumelleau calls a “wonderfully vicious positive cycle.”

Vision Realized

Perhaps the most significant decision in the company’s history came in 1995. Jack Lockton and a few of his partners had built a successful Kansas City office. Their initial expansion was confined to St. Louis and Denver. Jack and the board came to the conclusion that while these offices were very successful, Lockton would never be more than a successful regional agency if it didn’t expand to the West and East Coasts. That decision was the catalyst for positioning Lockton in Los Angeles and Florida, New York, Atlanta and Washington, D.C. Says Lumelleau, “That was a seminal decision. Otherwise, we would have remained a very fine, successful insurance agency in the middle of the country. Here we are now, the largest private independent broker in the world with the most significant organic growth in the history of the industry.”

The move to international markets is also boding well for Lockton. The company’s overseas operations allow it access to Lloyd’s of London and other London markets. The company has a strong insurance and reinsurance presence, risk management consulting business, claims management, and alternative risk financing consulting practices. Most recently, it opened its doors in Bermuda.

The Focus

This is a company unafraid of going where the customer wants to go. The company makes decisions based on one basic notion — get a client and keep a client. One need only look at the company’s beginnings and its offerings today to see it responds to customer needs without hesitation. Today, the company’s key markets include casualty/liability; property; mergers and acquisitions; Lockton Financial Services, primarily focused on executive risk areas such as directors and officers, errors and omissions and professional liability; its Executive Risk business, and its Employee Benefit business. The company has even dabbled (and become a highly regarded broker) in the energy sector in just six years. Particularly strong is the Employee Benefit segment of the company, which has grown from $50 million to $107 million in the last three years.

When it comes to growth, the company is far from finished. Six years ago, Lockton made a significant investment in the property market in hopes of raising its profile with customers. The company’s casualty line of business was, and remains, highly regarded in the industry. The result — the U.S. property and casualty business is 50 percent of the company’s revenue for fiscal 2007.

Similarly, the company’s merger and acquisition consulting business was one Lockton decided was another area of focus eight years ago. Today, Lumelleau is proud of the company’s record in the M&A space. “We think we have set the standard for how due diligence work is completed by brokers.”

Even with 50 percent of Lockton’s business revenue in fiscal 2007 coming from the domestic P/C market, the company boasts strong business in commercial insurance, employee benefits, retirement services and its original product, the surety bond. With 90 percent reinvestment in the front line of the business, the numbers will in all likelihood improve.

By following customers’ needs, this once-local company known for construction bonding now has a diverse list of property and casualty focus areas, including nonprofits, legal, automotive and health care. It also offers expertise in risk management, risk finance, loss control, employee benefits consulting, claims, and mergers and acquisitions.

How does a CEO keep up with such exponential growth? By redefining his role. “As CEO, I view my role as chief growth officer,” says Lumelleau. “With the exception of our recent acquisition, Lockton has not been an acquisitive organization.”

Lumelleau calls the privately-held status of the company “a huge advantage” because management can concentrate on delivering to the customer. “Not to have the quarterly analyst calls and the increased earnings-per-share expectations of Wall Street, as our chairman says, to make decisions about the next quarter meaning 25 years, not 90 days.” Decisions are held to the highest authorities — the clients and the employees. “Companies often fail their employees, and we try not to put ourselves in the position to fail those two constituencies,” adds Lumelleau.

Being privately-held eliminates pressure to make short-term decisions that don’t serve clients for the long term. That’s not to say mistakes aren’t made. Lumelleau readily admits to making mistakes. Most involve moving too slowly or too quickly with regard to Lockton talent. Lumelleau takes full responsibility for any mistakes, and he is quick to share credit for good decisions. For example, while he was instrumental in the company’s recent acquisition, Lumelleau paints it as a victory for the entire company.

“That was a defining moment for Lockton. We had demonstrated year after year that Lockton was at the top of the marketplace when it came to producing U.S. business and maintaining clients more effectively than our competitors. While we had a wonderful network of relationships around the world to service our business, the acquisition was a strategic imperative for Lockton. Every year as we grew, an ever-increasing percentage of that success in the United States included companies that had overseas service needs themselves. Our Achilles’ heel was that we didn’t own anything that was Lockton’s around the world.”

Flat and Lean

Lumelleau’s self-deprecating nature is a reflection of Lockton’s flat management structure. Employees are given independence to perform their jobs with minimal intervention by management. In fact, Lockton is pretty lean in terms of senior management. Lumelleau counts seven at the top, not including various vice presidents. Lockton employees are also compensated well for their efforts. It’s all part of what Lumelleau says is the strategy for retaining hand-picked employees.

“The benefit of a flat structure is absolute clarity in every one of our almost 4,000 associates around the world. It’s the clarity about what’s important to us. There is no ambiguity and no bureaucracy that obscures the most important thing — taking care of clients. That’s a significant advantage to how Lockton is organized as a company.”

The retention strategy is working for customers and employees. Lockton boasts a 95 percent customer retention rate, well above the average 85 percent rate for the industry. Also, its annual employee turnover rate is less than 5 percent. Lumelleau says employee retention assures a prospect that the team that impressed at the sale will most likely be the same team servicing the account years later.

Ten years ago the company had 716 employees. It expects to hire nearly 200 more employees in 2008 to serve its 15,000-and-growing number of clients.

Lumelleau believes that the company does well by following the needs of the individual client, not the corporate needs of the company’s bottom line. “We try to be strategic on behalf of our clients. While we may have growth expectations every year, those expectations are built from the ground up on the basic business tenets. We try to focus individually on those business segments and not cloud the issue by combining strategies,” he explains.

In short, the central force behind Lockton’s phenomenal growth is the customer.