From the change in capital gains tax to the wider economic turmoil, 2008 has proved an interesting year for brokers, reports Alwynne Gwilt
If one thing will be said about 2008, it will be that it was not a quiet year for any company involved in the financial services sector. From the credit crunch, to a growing fear over lack of capital in the markets, the year has changed much more rapidly than most expected and this trend looks set to continue for 2009. "Three times as much capital has left the market in the past four months compared with after 9/11," points out Oliver Laughton-Scott, a managing partner at Imas Corporate Advisors. So what have all these changes meant for the broking community now and in the future?
If compared with 2007, the start of this year might have seemed to signal more of the same. Throughout the first two quarters, acquisition activity was fierce once again, pulling off the back of the strong fourth quarter that preceded it. And it was the consolidators that were centre stage once more with help from the generosity of their backers: Jelf received a £45m boost from 3I in January while Giles garnered a £500m war chest in March from Charterhouse Capital Partners, the private equity firm that took over from its predecessor, Gresham Private Equity. Both seemed in a position to take the market by storm and ensure that 2008 would be another major year of activity for the consolidators.
Throughout the first half of the year, activity levels remained high. Towergate subsidiary Cullum Capital Ventures pursued deals throughout February - when it took on the small and medium-sized enterprise arm of Lockton. There was also its absorption of Berkeley Alexandar and South-Wales based Protectagroup, the 26th and 27th acquisitions in 18 months, respectively, which pushed the company past the £200m gross written premium mark.
Giles too attracted attention when it first dipped into the new-found cash, picking up three companies - Birmingham-based Midland Risk Management, Robinson Leslie of Chester and DS Howell of Tonyrefail in Wales - also in March.
With the Capital Gains Tax deadline of 6 April many companies opted to avoid the increase to 18% from 10% by buying early. CCV picked up another two brokers while Jelf brought in Clarke Roxburgh and Argyll, both of which helped increase the company's premium. Cobra also joined the fray, grabbing three brokers and an underwriting agency before the deadline, while Towergate sealed a £100m hedge fund deal with US-based Och-Ziff. Although a large change in the legislation, it did not make a massive difference, says Mr Laughton-Scott: "It just meant some people brought transactions forward by a few months but it was not a fundamental impact."
However, towards the end of May there were early signals that things could be changing: Oval, which at that time had officially been rebuffed by Perkins Slade over a possible takeover deal, decided to put all acquisitions on hold for the summer. The company's chief executive Phillip Hodson then said: "In response to the economic shifts in the current market that have been especially evident over the last two months, and the fact that we made 11 acquisitions in the last financial year, the decision has been made to take a short summer pause in our acquisition process." Come the end of Q2, more attention was being paid by brokers to the economy it seemed.
But the year's first half was not only populated by consolidators buying brokers. The two-way street of insurers getting involved in a melange of deals was similar to 2007. In February, Ecclesiastical bought South Essex Insurance Brokers, moving for the first time into this arena. RSA too entered the broker field by grabbing Fyfe Group, for an undisclosed amount, but subsequently turned it into underwriting agency.
Then in June, Norwich Union put £5.7m behind a buyout of insurance broker Group Direct, placing 30 million shares at a price of 19p, giving it a 9.2% share in a move the company said showed its support of independent brokers. At that time, an NU spokeswoman commented: "This deal is another example of our commitment to maintaining an independent broker channel. It is similar to other investments we have made and is one of a variety of ways that we can help support brokers."
And the widening of broker and insurer footprints did not stop there. Towergate diversified from its routine by investing in the independent financial adviser market through its acquisition of Albannach Financial Management. At the time, Patrick Snowball, chairman of Towergate Financial Services, said: "This acquisition will form the basis of our consolidation plans in Scotland and the north of England. Over the next three months we will be announcing further moves as we execute our consolidation model for the IFA market." Indeed, this seemed more plausible since by July the company had raised over £100m to pursue its plans to acquire regional IFAs, with funding coming mainly from The Royal Bank of Scotland, Lloyds TSB Corporate Markets and Towergate management.
Furthermore, brokers continued to be faced with the growing challenge that aggregators have brought to the distribution market. "Aggregators have been the feature of the year," says Paul Brierley, managing director of Our Network. However, aggregators too have been faced with their own setbacks that may continue on into 2009. "In the last year we've seen the personal lines market being transformed by aggregators. They've really pushed down value. But aggregators are becoming victims of their own success because of competition," says Mr Laughton-Scott. This potential difficulty was added to the move by the Financial Services Authority to delve deeper into its doings with an investigative paper, published in May, looking into whether aggregates were fully living up to Treating Customers Fairly guidelines. This was partially prompted by the British Insurance Brokers' Association's own publication earlier in the year, which it said showed "serious consumer detriment", revealing that 84% of insurance buyers felt that details of policies offered via price comparison websites were confusing. Eric Galbraith, Biba's CEO, has said that, months on, he is still worried: "There are still quite a number out there that are not TCF and are misleading and that concerns me."
The year's first half was also full of executive swaps that saw a major shuffle of those leading the frontlines. In January came the management buyout of one of Scotland's largest independent brokers, Central Insurance Services, which led to Dave Thomas, the majority shareholder and managing director, stepping down. Then, less than two weeks later a shake up at Axa-owned Venture Preference (to be known as Bluefin from next year) led to the exit of Chris Blackham, the former CEO of Layton Blackham, and Paul Meehan, the former CEO of Smart and Cook. The two had shared a tri-partite CEO role with Stuart Reid who took over the post on his own, telling Post the move was a "blindingly obvious conclusion". Then in April, in what was rumoured as a move to better Axa's relationship with its broker partners, Peter Hubbard stepped down as UK CEO, to be replaced by Philippe Maso. June capped off the first half with the departure of Patrick Snowball as the deputy chairman of Towergate. The move was linked to Towergate's failure to raise significant funds through private equity house Candover earlier in the year and a subsequent delay in a possible float.
Moving into Q3, surface changes in the confidence of buyers began to change and it seemed people were paying more attention to capital expenditures. Deals slowed down, certainly, although this did not mean things fully ground to a halt. Giles decided to push its Welsh focus, acquiring three companies there in July and August and following it up with another last month. It was a sign, after all, that the big guys were pulling through the credit crunch better than others. "The financial crisis stopped consolidation in the broker market as cash became a scarce resource. But cash-rich companies have become prominent players," says Mr Maso.
The summer months also saw the return of mega-deals. In July, Willis received confirmation from the US Federal Trade Commission that the acquisition of Hilb Rogal and Hobbs under the Hart-Scott-Rodino Antitrust Improvements Act had been approved and given an early termination of the waiting period. Then, one month later, Aon confirmed its plans to acquire rival Benfield for £844m. "The mega-deals are back," says Mr Laughton-Scott, before adding: "But this won't stop the long-term decline of the mega brokers versus the medium ones."
These came alongside Lloyd's insurer Amlin's move into the broking sector, with the purchase first in July of a stake in Miles Smith and just a few weeks later at the end of August in TL Dallas.
Our Network also launched creating a broker-owned insurance management company specifically for members of the Institute of Insurance Brokers. At the time, Mr Brierley said: "It has been created to provide a comprehensive range of products, services and remuneration to cover all of a broker's needs. However, it is not about trying to lock them in or demand set volumes of business. It has been created to enable members to compete effectively with the direct writers and larger intermediaries. It allows them to remain truly independent and is about quality, professionalism and good old fashioned utmost good faith."
Amid these deals, the financial industry worldwide was taking a battering. But it was not until September when the true nature of the recession beast began to shine through: investment bank Lehman Brothers filed for bankruptcy and AIG was rescued by the US Federal Reserve. AIG UK quickly moved to assure UK brokers here, saying in a statement: "AIG UK's ability to pay claims and to protect companies and consumers in the UK and around the world is undiminished. AIG UK is a stand alone UK regulated insurance company, separate from any other AIG Group legal entity. As a separate company AIG UK retains assets and capital to meet its UK policy obligations ensuring continued protection for its policyholders. AIG UK is regulated by the FSA."
This continuing uncertainty over capital markets means there has had to be more focus on preparations for what could be a very rocky 2009. "I don't think the industry expected the financial crisis to be so deep and so profoundly structural that it requires a complete transformation of the financial system. 2008 included massive changes for the market and 2009 will be a repeat of 2008 but I expect it has great possibility to be worse than this year," said Mr Maso.
However, for brokers, a distinct hardening of rates looks likely to finally come in by Q1 2009. "The result is that the 2009 results for many brokers could be much better than for many years, making them more attractive to buyers," says David Coupe, a partner in the corporate insurance practice at Clyde and Co law firm. However, Laurent Matras, managing director of Groupama says he will believe it when he sees it. "Any time we thought they ought to go up on the commercial side they didn't really. The market said the same thing last year after the floods. Although we've probably reached some sort of trigger point," he says.
Aside from possible changes to rates, there is also regulation that brokers should pay attention to. "The FSA has been looking quite hard at brokers' conflicts of interests and how they've managed those and for 2009, I think issues around it will again feature," says Liz Johnson, an insurance partner with Pinsent Masons.
So, with a rapidly changing economic climate that looks set to stay gloomy, the possibility of hardening rates finally on the horizon, competition still in the wings from aggregators and insurers more conscious of their bottom line, what should brokers be doing? Simon Cooter, distribution director at Brit, suggests: "The most successful organisations in 2009 are likely to be the most nimble ones: brokers with an ability to respond to rapidly changing client needs, and insurers that can move quickly to support them." And Mr Galbraith has said he recommends a proactive approach to advice delivery, telling Post recently: "Brokers need to be aware of what's going on in the market and speak to their clients well before renewal. This will ensure clients understand what's going on and value their insurance. In turn, this will reduce the likelihood of them cancelling it." Deals will also most likely become more strategic, adds Mr Laughton-Scott. "It's no longer a consolidation play, it's much more about finding a strategic fit and is about capability, not capacity," he says, citing November's acquisition of SBP by Giles as one example. It will no doubt be a bumpy ride ahead, but many say that smart brokers will be in a good place to push forward through the chaos in 2009.
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