Facing the changes

The past 12 months were always going to be difficult for brokers, with the introduction of statutory regulation. Guy Anker reports on the upheavals that occurred and why it was not all doom and gloom for the industry

The past year is one that many in the broking industry are not going to be able to forget in a hurry. Most intermediaries knew it was going to be a tough 12 months of major change, as statutory regulation by the Financial Services Authority kicked in on 15 January.

If, this time last year, the industry thought 2005 would be dominated by regulation and regulation alone, however, then it could not have been more wrong.

New York Attorney General Eliot Spitzer's investigation into bid rigging and illegal inducements among the global brokers, which began across the Atlantic in October 2004, created a minefield of trouble that has resulted in thousands of employees losing their jobs, and major changes to broking models and commission structures this year.

The past 12 months also included several high-profile buys, and saw the first casualties of the new enforcement regime.

Among the year's biggest losers have been the global brokers with Marsh arguably suffering the worst, followed by Aon. Mark Grice, an analyst at Mazars, believes their woes could continue: "There is uncertainty at Aon and Marsh. It is difficult for them, as they still have to convince clients they have not ripped them off in the past."

Spitzer fallout

Marsh has revealed a raft of job cuts during the year resulting in a total of 5500 employees worldwide leaving the broker, following the Spitzer fall-out. It was also forced to pay $850m (£490.9m) compensation to clients in January after admitting it had "deceived customers".

In the UK, the company has shelved more than 1000 jobs this year as part of its restructure - which also included the establishment of a new business model, prompting it to consolidate offices in some cities and a change to its pricing structure to eliminate contingent commissions.

Despite the concerns expressed by Mr Grice, Bruce Carnegie-Brown, chief executive of Marsh Europe and Middle East, insists the broker is ready to punch its full weight in the market once more: "We are ready to buy again and be aggressive, as we have come through our issues in good shape."

Aon has had to suffer similar heartaches to its rival. This year it introduced what it refers to as a "one town, one office" regional model, as part of a restructure that also saw it announce 750 job cuts in the UK in October. Aon UK chairman and chief executive Dennis Mahoney admitted he "hated" this part of the job.

That was not the end of the troubles at Aon, however, after it emerged the job losses could also include a boardroom shake-up, according to sources at the broker.

Another boardroom change, only last week, saw Dominic Burke appointed JLT chief executive, as a replacement for Steve McGill, who dramatically quit last year.

On a more amusing note, given the pressure to avoid conflicts of interests in the market, Aon took the drastic decision to limit the amount clients could spend on its brokers to £70 a time. The move caused much commotion in the market, with Aon often the butt of jokes from its rivals, especially given no other firm has issued such strict corporate hospitality rules.

With the axing of employees from the two broking giants and the subsequent fallout, there are a number of disgruntled employees - both working at the firms, as well as those let go - something Heath Lambert has already taken advantage of.

Speaking to Post Magazine in November, chief executive Adrian Colosso, who was promoted to the role in March after the retirement of chairman Ian Martin, revealed his broker planned to recruit unhappy staff from Marsh and Aon.

Within days of the announcement he proved true to his word, when several employees were poached from Aon's Newcastle office to bolster Heath Lambert's new presence in the same city.

Far from being the vulture swooping on its lesser prey, however, Heath Lambert has had a year it will want to forget too. While it has not had to endure large-scale job losses, the broker has had its own issues to contend with.

Pension deficit

For example, the company could have gone out of business in June, had it not found external investment to help plug a £210m pension deficit. It also claims to have rid itself of £300m of debt following a turbulent few years, which included a failed flotation, numerous job losses and the reshaping of an outdated business model.

Mr Colosso revealed the firm will conduct an efficiency review early next year as it looks to move further away from its past difficulties.

Problems experienced by the big guns have meant more opportunities for others to pick up business. For example, Alexander Forbes, which itself has been under the spotlight after several staff members from its Professions team jumped ship to join the Primary Group's professional indemnity start-up, claimed it can win business from the global players.

Stewart McCulloch, chief executive of international risk services at Alexander Forbes, claimed in October that companies like his own could take new business from smaller US-only brokers, that would have otherwise placed international business through Marsh, Aon or Willis to the wider world but have lost trust in the global trio.

This is something Mr Grice recognises: "I would say the Spitzer stuff has meant there is more work about for the smaller players."

Despite the troubles at the top, Lloyd Hanks, broker development manager at Allianz Cornhill, believes it has been a good year for the market overall. "When you take the nationals out of the equation, the high street brokers are resilient," he argues. "While regulation was a challenge, they have embraced it - 15 January was like taking your driving test, and then you start to learn, and that is what the market is doing. Brokers are getting better, although our dealings with them have not changed dramatically."

Notwithstanding those sentiments, the market did suffer problems outside the large multinationals, with 2005 also bearing witness to the collapse of three relatively small firms. Small they may have been but these developments were still significant by virtue of these firms being the first trio to fall foul of the FSA's intermediary regime.

First up, in April, came Whiteley Insurance Consultants, when the FSA alleged that the firm had been selling travel policies without any underwriting backing. The company was placed into the hands of provisional liquidator Pricewaterhouse Coopers by the High Court at the time.

The following month, commercial and personal lines intermediary BPS Insure was placed into the hands of administrator Begbies Traynor, due to an alleged deficit in its client money account. It subsequently emerged that the value of the hole came to £2m, while the business was sold to Towergate before its failure had even been made public. Most recently, Fabien Risk Services collapsed with debts of £700,000, although the reason for that debt appearing remains unclear.

Interestingly, while Towergate snapped up BPS Insure immediately after its demise, it also appeared to consider the same move with Fabien. PM received a call from someone claiming to work for Sterling Hamilton Wright, a Towergate subsidiary, after learning of Fabien's collapse. The caller said he was interested in buying Fabien's book before it was eventually offloaded to a new firm called Winchgate Investments, set up by a former Fabien employee.

While Towergate may have failed in that particular acquisitive quest, the same cannot be said of the rest of its attempts. Its power in the buying market was further strengthened by the merging of Andy Homer's Folgate Partnership and Peter Cullum's Towergate Underwriting, formally completed in October.

During 2005, the combined company passed the 100-mark in terms of purchases, then snapped-up underwriting agency Fusion in November - a move that confirmed Mr Cullum's claims that Towergate planned to focus on larger buys. Only last week, the group confirmed plans, first revealed in PM in August (4 August, p1), to establish a venture capital arm. With the probable name of Cullum Capital Ventures, this vehicle will target smaller buys.

Spending spree

While Towergate has been the big acquirer this year, the likes of Oval and Smart and Cook have also been hot on the buying trail. Other brokers that have stepped into the limelight include Welsh firm Thomas Carroll, which, in March, was named as one of the UK's top 100 employers in The Sunday Times' 100 Best SME Companies to Work For. It also plans to grow its presence in Wales and into England.

The big buys were reserved for the big boys of the market, however. Oval swooped for £18m premium income commercial broker John Eke and Partners in October, to add to its array of already purchased large intermediaries, which include Beddis and Partners and RP Hodson.

Smart and Cook bought £25m GWP Hammon Osborne in June. Other significant buys to note include Capita snapping-up the growing BDML business, which has secured a range of lucrative contracts this year, including spill-over business that Norwich Union does not require from RAC.

NU's own £1.1bn purchase of motoring giant RAC included the company's broking arm. No sooner had the acquisition gone through in the summer, than the insurer ditched its subsidiary's broker panel enabling the UK's largest general insurer to become RAC's sole provider from the start of 2006.

Mr Homer believes the consolidating will continue apace: "If you look at the consolidators, then the major ones are ourselves, Oval, and Smart and Cook. In the past 12 months, we have not seen one company come to the forefront and no one has surprised us by arriving on the scene.

"There might be some new entrants on the buying scene in future as there are a lot of ex-insurance executives yet to land on their feet - like the Churchill team, and the ex-NIG team. It is possible to raise capital for consolidation like we have shown."

Mark Cliff, distribution director at Axa, believes future consolidation will change the face of broking operations in the market: "Although we have seen a 20% drop in the number of broker firms in the past year, what we have - and will continue to witness - is a new breed of better organised, more professional broking firms."

While there were significant changes at brokers such as RAC this year, the motoring firm's main rival, the AA, has also seen many alterations to its broking arm. AA Insurance Services appointed a new boss in April, former Axa stalwart Kevin Sinclair to replace Neale Phillips.

Mr Sinclair has already made his mark, despite his relatively short tenure in charge. After a review, he decided the AA should maintain its 23-strong insurer panel, and he revealed plans to grow the broker's customer base way beyond the two million mark, by achieving greater cross-selling opportunities across the group.

The AA also revealed it will launch a consumer legal arm in 2007, with many clients sourced from its list of policyholders. However, Mr Sinclair ruled out any moves to offshore jobs, although he revealed that would mean the broker having to cut its workforce by 100 to achieve necessary cost savings.

While the AA has not made any moves to India this year, others have. Marsh's back-office pilot proved so successful that it will have moved 150 jobs to the Asian sub-continent by the end of this year. Welsh broker Moorhouse has also continued its drive to have 500 employees in India within two years.

Speaking of the future, many commentators believe the broking market has much to look forward to. Mr Homer predicts rates will harden, especially following Hurricane Katrina, which devastated parts of the US in August. Mr Grice agrees, adding that a stronger dollar with also aid the larger firms.

However, it is not all sweetness and light, as many hurdles still need to be overcome. Mr Grice says that while the turmoil that has affected the global brokers is slowly subsiding, "it will be another year for the big boys to settle down and another year of transition in 2006".

Moves to achieve contract certainty by the end of next year will have a significant impact on the market while the FSA's calls for greater transparency of commissions mean the shadow of Spitzer is unlikely to lift just yet.

MAJOR BROKING DEVELOPMENTS OF 2005

ACQUISITIONS

March - Norwich Union successfully bids for RAC (sale went through in June)

June - Smart and Cook buys Hammon Osborne

July - Capita buys BDML Connect

October - Oval buys John Eke and Partners

November - Towergate acquires Fusion

JOB LOSSES

April - Marsh completes plan to slash 1030 UK jobs

August - 100 employees go at AA Insurance Services

October - Aon axes 750 UK staff

APPOINTMENTS AT THE TOP

March - Adrian Colosso made Heath Lambert chief executive

April - Kevin Sinclair appointed head of AA Insurance Services

May - Aon appoints Steve McGill as chief executive officer of new global large corporate business

December - JLT appoints Dominic Burke as chief executive.

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