Top 25 brokers: Analysis - Slow and steady wins the race

A weak US dollar and further softening of rates put EC3 brokers under continued pressure this year, with a healthy amount of acquisitions the only positive news, as James Simpson reveals

While there have been some changes in the Top 25 EC3 Brokers the rate of change remains muted, particularly compared to regional activity. Corporate activity has been a prime cause of what change there has been; THB acquired PWS at the start of 2008; SBJ was bought by Axa in March 2008; and Oxygen acquired Robertson Taylor in August 2007, which, with its core business, has brought them a first appearance in the Top 25. A first appearance is also made by Lloyd and Partners, the independent EC3 arm of JLT.

Feeling the pressure

All businesses have been under pressure from weak US dollar exchange rates and a softening of premium rates. Insurers - Lloyd's in particular - announced good results for 2006/07, due to the lack of significant losses and, therefore, there have been no real drivers to reverse this.

Acquisition is the underlying factor for two of the top three income growth brokers (see graph 1), Oxygen and THB, with the other podium finisher, Lloyd and Partners, combining organic growth with an acquisition. The predominantly organic performance of the other top 10 growth brokers is highly credible, ranging between 15% and 20%.

It is another top 10 appearance for RK Harrison and Hyperion, both of which featured as top performers last year, with solid 15% performances this year. Cooper Gay tops the table for organic growth, with its only 'acquisition' being team recruits in the latter part of 2007, which IMAS would expect to benefit 2008 more that 2007. This is an excellent performance and further acquisitions should be expected in 2008 to maintain this growth.

Lloyd and Partners has grown significantly since its launch in 2005 as an arms length EC3 wholesale broker and with the acquisition of Park in 2007 has entered the Top 25 at number nine.

Income growth needs to be matched by profits otherwise the housekeeping purse will empty and business begin to look threadbare. The year 2006 saw a number of the EC3 brokers have a clearout and so their 2007 performances look extreme (see graph 2). Tyser, Cooper Gay, Gallaher and Carvill all show significant turnarounds in profits, but it is only Cooper Gay that has achieved a top 10 performance by way of actual profit margin as a consequence.

Solid as a rock

Profit margins for EC3 brokers have never been exciting, costs are high whether it be for staff or accommodation or conducting business (see graph 3). The top four brokers by margin have all achieved in excess of 20% and fifth placed Alwen Hough Johnson was not far behind with 18%. In the top slot again is Windsor, with a margin of 28% up on last year by a small amount; an excellent achievement and one that will be greatly welcomed by its new private shareholders.

Lloyd and Partners feature too, and are tied at number two with Cooper Gay, another good performance given usual expectations about group overhead cross charges.

Income per employee is about productivity and EC3 brokers have a number of handicaps, not least the legacy issues that businesses have (see graph 4). It is, therefore, not surprising that 'newer' brokers have better figures and improvements in income per employee rather than the absolute figures that have been concentrated on (see graph 5).

Acquisition activity

Top of this measure comes THB and this is as a result of the recent acquisition of PWS, an 'old' broker, whereby the legacy has been left behind and only the currently productive staff joined THB. Number two is Tyser and Co reflecting the success of its work in 2006 and resurgence.

It is worth noting that the top performing EC3 brokers achieve lower margins than top brokers in other fields. This is a function of the costly employment packages required to retain talented employees. Again, it is the change in this cost, rather than which is the best payer, that is more interesting from an analytical point of view - the highest average payer being Carvill and Co based on its 2006 figures and Newman Martin and Buchan on its May 2007 figures.

The average cost per employee has risen 10% for five brokers: Windsor, Tyser, NMB, Hyperion and AHJ. All of these reflect their performances, whether it be their increased income and staff benefiting from income shares or profitability and profit shares.

A look at brokers' balance sheets shows that there is a solid block of brokers whose asset base is in the 40% to 50% of revenue (see graph 6). Not many have significant acquisition goodwill in their balance sheet, although some restructuring has created goodwill. Benfield is an exception with 100% of its net assets being goodwill. The highest ratio is that of AHJ, but this reflects its investment in BMS rather than its internal business assets.

- James Simpson is principal at IMAS Corporate Advisors.

Slow and steady wins the race (PDF, 216KB)
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