Lockton's Private Equity Investment Strategy: What You Need To Know

Lockton is the world's largest independent and privately held insurance brokerage firm, with a revenue of over $3 billion. The company has a 97% retention rate and serves more than 65,000 clients across six continents. Lockton's private equity team provides risk transfer and insurance solutions for businesses in the private equity sector. The team is made up of industry leaders with decades of experience in the private equity insurance sector. They offer a range of services, including professional indemnity, directors and officers' liability insurance, and portfolio company insurance. With a focus on delivering exceptional client service, Lockton is committed to meeting the changing needs of its clients and providing tailored solutions.

Lockton's Private Equity Practice Group (PEP)

Lockton Private Equity Practice Group (PEP)

Lockton is the world's largest independent and privately held insurance brokerage firm, with a presence in over 140 countries and a 96-98% client retention rate. The Lockton Private Equity Practice Group (PEP) is a partner-led initiative that leverages the company's global expertise across all coverage lines to provide comprehensive solutions for businesses in the private equity sector.

PEP is committed to understanding the unique needs and aspirations of each client. The team is comprised of industry leaders with extensive experience in the private equity insurance sector, including lawyers, ex-underwriters, and risk managers. This diverse expertise allows them to address the specific risks faced by firms in the industry, such as operational, compliance, cyber, technology, intellectual property, and transactional risks.

PEP's flat structure ensures that clients benefit from a 'hands-on' approach from the most senior members of the team. They work seamlessly across all Lockton business units, taking a holistic approach to assessing and mitigating risks. The group is driven by the strategic direction and needs of their clients, rather than the renewal cycle.

PEP also has its own in-house dedicated claims team for real estate and construction claims, ensuring a fast and proficient service. They negotiate broad terms at competitive rates, and their policy wording goes beyond that of non-specialist brokers.

Whether it's corporate lines, consultancy needs, personal protection, or portfolio asset protection, PEP provides tailored risk transfer and insurance solutions to the private equity sector. They work in partnership with their clients to understand their exposures and engineer a programme that mitigates risk and provides the right level of protection.

PEP recognises the importance of complementing other long-term risk mitigation strategies. They assist private equity firms in optimising their approach to contain costs, preserve liquidity, and protect their investment portfolio. PEP's insurance programmes are designed to facilitate the financial success of private equity firms, covering everything from fundraising and portfolio management to divestiture strategy.

In conclusion, Lockton's Private Equity Practice Group (PEP) is a trusted partner for businesses in the private equity sector, offering reliable risk transfer and insurance solutions that are customised to meet their dynamic needs and objectives.

Lockton's global revenue and growth

Lockton, the world's largest privately held insurance brokerage, has seen impressive global revenue and growth in recent years. In its fiscal year ending April 30, 2024, the company reported consolidated global revenue of over $3.5 billion, a 15% increase from the previous fiscal year. This growth was driven by a 14% organic revenue increase, marking the fourth consecutive year of double-digit organic global revenue growth.

Lockton's US operations played a significant role in this success, contributing $2.43 billion in revenue, an 11% increase from the prior year. This achievement marks the sixth consecutive year of double-digit revenue growth for the company's US division.

International operations also thrived, generating $926 million in revenue, representing a remarkable 24% growth compared to the previous fiscal year. This surpasses the five-year organic revenue CAGR of 16% for Lockton's international endeavours.

Lockton Re's global operations stood out with a notable 35% revenue growth over the previous year, showcasing the company's consistent expansion across various business segments and geographies.

The company's private ownership model and long-term strategy have been instrumental in driving this growth. Lockton's Chairman and CEO, Ron Lockton, attributed their success to their differentiated business model and continued investment in service, innovation, and talent. The private ownership structure allows Lockton to prioritise clients and employees, fostering a strong foundation for sustainable global growth.

Looking ahead, Lockton is well-positioned to maintain its impressive trajectory. The company plans to continue investing in its people, clients, and industry-leading talent while developing its capabilities and expertise to meet the evolving needs of its global client base.

Private equity insurance

Private equity (PE) has an increasing presence in the insurance industry. The relationship between PE and the insurance industry is bidirectional. On the one hand, U.S. insurance companies, particularly life insurers, invest in PE to increase the return on their balance sheet portfolios. On the other hand, PE firms are increasingly investing in insurance companies and taking full ownership.

Private Equity Explained

PE is capital invested in businesses, ventures, funds, or other assets that are not listed on public exchanges. PE firms are investment management companies, and their investments usually take the form of a PE fund, typically a limited partnership. A general partner (GP) manages the fund, and limited partners (LPs) are investors. LPs are often sophisticated institutional investors or high-net-worth individuals.

Private Equity in the Insurance Industry

The involvement of PE firms in the insurance sector can be categorised into three main areas:

• Establishing or acquiring insurers: PE sponsors may establish their own life and annuity insurance or reinsurance companies, either wholly or partially owned, to gain direct access to long-term capital.
• Acquiring insurance intermediaries: PE sponsors may acquire insurance intermediary businesses, such as brokerages, as portfolio companies and use them as platforms for consolidation or roll-ups.
• Investing in reinsurance vehicles: PE sponsors may establish or acquire reinsurance companies, often in jurisdictions like Bermuda, to support primary insurers and enable them to write more business.

Factors Driving Private Equity Investment in Insurance

Several factors contribute to the growing interest of PE firms in the insurance industry:

• Competitive environment: The private equity deal market is highly competitive, and the insurance industry offers an opportunity for diversification.
• Long-term capital management: Life and annuity insurers and reinsurers provide access to long-term capital, which is challenging to move but can be invested in private credit strategies.
• Stable investment base: Investing in insurance assets provides a stable base for GPs to build their alternative credit capabilities and generate fee-related earnings.
• Potential for scale: The significant size of the insurance market, particularly in life and annuity liabilities, offers PE firms the potential for achieving scale and taking advantage of efficient investment strategies.
• Consolidation opportunities: In many jurisdictions, the insurance brokerage business is fragmented, presenting opportunities for PE sponsors to consolidate and create cost and revenue synergies.

Regulatory Considerations

The increasing involvement of PE firms in the insurance industry has raised concerns among elected officials and regulators. The National Association of Insurance Commissioners (NAIC) in the U.S. has identified 13 regulatory considerations to address risks associated with sponsor-owned insurers, including structural transparency, ownership, and investment management agreements. While regulators are becoming more comfortable with PE ownership, approval processes can be time-consuming, and public opinion can influence the outcome of deals.

Impact on Insurance Companies

The entry of PE firms into the insurance industry has had a significant impact on insurance companies:

• Strategic shifts: Some insurers have shifted their focus to capital-light, fee-based business models, such as investment management, while others have chosen to exit certain businesses and return capital to shareholders.
• Improved investment performance: PE firms bring advanced investment management capabilities, optimising strategic asset allocation and generating higher investment returns, which can lead to an increased return on equity (ROE) for insurance companies.
• Value creation: PE ownership can drive value creation through levers such as capital efficiency, operations/IT improvement, technical excellence, commercial uplift, and franchise growth, in addition to investment performance.
• Operational efficiency: Disciplined ownership by PE firms can lead to more efficient and effective operations, although cost-cutting efforts in insurance need to be carefully managed due to complex legacy systems and policy nuances.

Private equity investment in the insurance industry is a complex and evolving topic. PE firms are attracted to the insurance sector by the opportunity to access and manage long-term capital, diversify their portfolios, and achieve scale. At the same time, they must navigate regulatory considerations and address concerns about their ownership of insurers. Insurance companies, on the other hand, can benefit from PE investment through improved investment performance, value creation, and strategic shifts. As the presence of PE in insurance grows, further developments and adjustments in the industry can be expected.

Risks in the private equity sector

Private equity investments are inherently risky, and investors need to be aware of the potential pitfalls before committing their capital. Here are some of the key risks in the private equity sector:

Liquidity Risk

Private equity investors are expected to lock in their capital for several years, usually between four and seven years, and sometimes even longer. This long-term commitment creates a liquidity risk, as investors are unable to redeem their investment during that period. The illiquid nature of private equity investments means that investors may be forced to sell other illiquid assets to meet their commitments if they face a funding shortfall.

Market Risk

Private equity investments often involve investing in new companies or startups with unproven business models. This lack of track record can lead to significant losses if the companies fail to live up to expectations. Market risk is prevalent in private equity due to the high failure rate among these young companies. Only a small percentage of startups deliver significant returns, and an ineffective management team or a failed product launch can lead to substantial losses for investors.

Operational Risk

Operational risk refers to the potential for losses resulting from inadequate processes and systems within the organisation. Private equity firms are particularly vulnerable to this risk due to their involvement in complex transactions, lean operating structures, intense competition, and extensive use of third-party intermediaries. Operational risk can impact the performance of the portfolio companies and the overall returns generated by the private equity fund.

Funding Risk

Funding risk is closely related to liquidity risk. It arises when investors are unable to meet their capital commitments. Private equity funds typically do not call upon all the committed capital at once, but rather draw it down as needed for investments. However, if investors face liquidity issues, the private equity fund may be forced to seek alternative sources of funding, which can be challenging and impact the fund's ability to execute its investment strategy.

Capital Risk

Capital risk refers to the possibility of losing the original capital invested at the end of a fund's life. In theory, all portfolio companies could experience a decline in their value, and in the worst-case scenario, their valuation could drop to zero. Capital risk is closely tied to market risk and the performance of the underlying companies. The quality of the fund manager and their ability to select companies with good growth prospects play a crucial role in mitigating capital risk.

Compliance and Regulatory Risk

With increasing government oversight and stricter compliance requirements, private equity firms face heightened compliance risks. Regulations such as the California Consumer Privacy Act (CCPA) require firms to protect consumer information and provide consumers with certain choices and rights regarding their personal data. Failure to comply with such regulations can lead to significant fines and reputational damage. Private equity firms must also ensure that their portfolio companies adhere to regulatory requirements to avoid legal and financial consequences.

Lockton's flat structure

Lockton is the world's largest independent and privately held insurance brokerage firm, with a presence in over 140 countries. The company's flat corporate structure enables a 'hands-on' approach from its most senior people, allowing them to be driven by their clients' needs and strategic direction rather than the renewal cycle. This structure empowers everyone at Lockton to raise ideas and make things happen, fostering a culture where people feel valued and understand their role in the process.

The flat structure at Lockton also encourages open communication and idea generation. Anyone within the company can raise ideas and drive innovation, creating an environment that values the contributions of all team members. This empowers employees to take ownership of their work and career paths, fostering a sense of responsibility and engagement.

Additionally, Lockton's flat structure facilitates a seamless engagement across different business units. The company operates as one team, taking a holistic approach to assessing the unique risks faced by their clients. By bringing together experts from various fields, such as law, underwriting, and risk management, Lockton offers tailored solutions that meet the specific needs of businesses in the private equity sector.

The benefits of Lockton's flat structure extend beyond client services. The company prioritises the well-being of its employees, offering initiatives like personal development plans, mentorship programs, and additional paid leave for wellness. This holistic approach to employee satisfaction contributes to a positive and productive workforce, further enhancing the company's performance and client relationships.

In conclusion, Lockton's flat structure is a key enabler of the company's success and unique position in the insurance industry. It empowers employees, fosters innovation, and ensures a client-centric approach, resulting in exceptional client retention rates and a positive work environment.

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