The End of the Beginning and the Beginning of the End

Halliburton was founded as an oilfield services firm in 1919, about the same time Brown & Root was formed as an engineering and construction company. But in 1962, the Brown brothers, who held the company privately, sold it to Halliburton. Thus began one of the most complicated and intriguing commercial insurance stories of the modern corporate world.

By Gregory DL Morris

"At the time I started with B&R (Brown & Root) in 1988," says James Ferguson, now director of risk management at Halliburton, based in Houston, "they had completely separate insurance offices as well as separate support services--information technology, procurement, legal, accounting, human resources, everything. Risk management reported as part of the legal department. I started in insurance and risk management, also as manager of litigation."

In 1995, Dick Cheney became CEO of Halliburton and the following year started to combine all of the support offices into one shared-services group. Risk management remained a part of the legal department, and Ferguson retained his dual role as director of risk management and assistant general counsel with responsibility for litigation.

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"We always had big retentions," says Ferguson, "about $2 million per claim. As the shared services were combined, insurance renewals were happening fairly quickly. Within a year we had Halliburton and B&R combined for insurance and retained risk. The law department was handling D&O, fiduciary and corporate-type coverage. Everything was pulled in." Redundancies were few.

Ferguson and his group started looking at the basic insurance programs in 1996, and were pleasantly surprised. "We found that our programs were not dissimilar, we were just buying everything twice. And we had excellent liability coverage, being the largest program. We calculated that total savings would come to $10 million a year, and that was 10 years ago."

Not long after a new streamlined insurance placement was completed, in 1998, Halliburton acquired Dresser Industries, a service provider for the oil industry. Halliburton's risk managers, brokers and underwriters had to go through the whole exercise again to fold in the new operations and companies.

In an interesting twist, the consolidation of programs threw the placements open to several brokers.

"At B&R, we had been using only one broker, Aon, or rather Energy Insurance, that Aon bought," says Ferguson. "They handled the 1996 combination of Halliburton and B&R, and also the combination with Dresser, but after that we used multiple brokers. We would decide internally on deductions and limits, and the brokers would place that program on the market."

Ferguson recalls needing all the guidance he could get from his brokers. "All of our brokers wanted to stay in our program. I was taking quotes from everywhere and trying to decide who would do the best job. I got some pretty heavy pitches."

At the same time, questions began to be raised internally about shared services. "Shared services was born during Cheney's reign," says Ferguson. "The business-unit guys never liked it. They were responsible for results from their units, but they did not have control over all the parts. Shared services had grown into this huge bureaucracy with all of these guys running around--managers of managers."

From a risk management perspective, energy services and engineering should not have been completely combined in the first place, says John S. Parsley, executive vice president with Newport Beach, Calif.-based Alliant Insurance Services Inc., now part of the investment company Blackstone Group.

"They have separate exposures to risk in everything. The claims history shows those different exposures. And into the mid-90s, they did have separate programs. Then came Cheney, and they did shared services. They did save $10 million a year on risk management and vast amounts on other things as well."

Parsley knows because at the time he was with Aon and handled "the entire account, minus a few carve-outs."

While giving Ferguson and all the brokers credit for all their hard work, Parsley notes that it did not hurt that the market was "receptive" at both ends of the consolidation, in the mid-90s with the merger, and over the past 18 months with KBR and Halliburton splitting.

It was, after all, important to present the placement with sensitivity to the carriers.

In 2002, just a year after the Dresser equipment group was sold and the rest of Dresser folded into KBR, the shared services group was eliminated, and the two major operating subsidiaries took on most of their own back-office functions, except risk management.

Ironically, the integration of Dresser validated the process by which Halliburton and B&R had been combined. At the same time, it also led to the realization that not all of the consolidation had played out as intended. It was the end of the beginning and the beginning of the end.

The end of the end came just a few months ago. With the dissolution of shared services, the way was clear for Halliburton to respond to investors and analysts by separating the two companies.

GREGORY DL MORRIS lives in New York City.

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October 1, 2007

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