Broking review of the year: A breakdown in momentum

breakdown

2010 was a fairly low key year for the broking market, as the sector kept a low profile during the financial turmoil. Daniel Dunkley reports on the opportunities that were taken up and deals made.

2010 was not exactly a 'big bang' year in the broking market. Talk of acquisitions, warchests and initial public offering strategies largely failed to materialise into action, as the market avoided a battering but remained low key.

But, as the wider financial markets stuttered towards recovery from the worst economic meltdown of modern times, a cautious and prudent broking market continued to grasp any opportunity that came its way.

One of the first brokers to signal its intent to acquire in 2010 was Swinton — purchasing the personal lines portfolio from Manchester-based Alternative Investment Market-listed broker CBG. Swinton also announced it would target 35 small personal lines acquisitions by the end of the year.

Never far from the rumour mill, Oval chief executive Phillip Hodson indicated that the company would consider a "transformational deal" to take it past its £200m gross written premium target, appointing investment bank Rothschild to consider its future options. Giles Insurance Brokers, meanwhile, not to be outshone, secured the acquisition of Lloyd's broker FSJ from Cooper Gay in the same month — its first acquisition in the London subscription market.

Ian Stutz, managing director of Leicester- based Brokerbility and B&R, believes the mergers and acquisitions market has shifted in 2010, as size and premium income become secondary to niche business: "Consolidators talked a fantastic game at the beginning of the year — but in the end have focused on picking up specialist businesses," he says.

Age demographic will continue to remain a huge factor next year, he adds: "We have had our own changes, acquiring shares in businesses of people that want retire — and I predict more activity along that line."

Amanda Blanc, deputy group chief executive at Towergate, agrees: "A lot of vendors have passed retirement age. You can expect consolidation to be a factor of the future — it is inevitable."

In April, Capita Insurance Services secured more clout in the niche motor market. Sureterm Direct, a Cambridge-based broker with a turnover of £7.6m, would turn out to be its first acquisition of the year.

Then, in May, the broker market saw signs of ambition through the return of former Brokerbility chief executive Stuart Randall's acquisition vehicle Ataraxia. He indicated the firm would target smaller brokers through its "succession planning"-style offering "for those who do not want to be bought by the likes of Towergate and CCV" — though the firm has yet to announce any significant deals as this article went to press.

Smoothing the way
Towergate, widely expected to be one of the first of the major consolidators to launch an IPO, attempted to smooth the way for it by restructuring. The proposal saw it set up new subsidiaries, to offer £365m (equivalent) senior secured notes due in 2017 and £300m (equivalent) senior notes due in 2018. Towergate had hoped the restructure would enable it to extend the time it needs to repay its debt to 2017, rather than repaying its bank debtors before or around the time of its anticipated IPO in 2012. However, the plan was postponed in May due to the continued uncertainty in the global financial markets.

Ian Clark, insurance partner at Deloitte, believes the IPO market is "not open at the moment": However, he adds: "It will be led by Towergate no doubt. You need capitalisation of £250m, and Oval and Giles are not at that level at the moment."

On a smaller scale, June saw Hastings Direct secure a £20m refinancing deal with Lloyds TSB Corporate Markets, its first significant capital injection since its management buy out in December 2008. At the time, Hastings chief executive Edward Fitzmaurice, told Post the deal would put ensure its long-term stability: "We decided to put in place a finance facility for Hastings Direct to support future growth." Those words remain poignant for the broker, as it revealed four months later it was to launch an IPO in 2012, after announcing its GWP had surpassed the £250m mark.

It could be argued that July saw one of the major broking stories of the year. The deal brokers at Fortis — or Ageas as it is now known — secured a £215m deal for Kwik Fit Insurance Services. As a result of the transaction, Ageas would employ around 4000 people in the UK. Kwik-Fit Insurance's revenue in 2009 was £89m meaning the deal took the insurer's total retail revenues to £189m.

Another significant deal came in August when Giles-owned Ink Underwriting Agencies took over the Westinsure network, for an undisclosed sum. Post revealed that Ink entered talks to acquire the business after initially meeting Westinsure's management to discuss becoming an insurance partner.

To put the deal into context, Westinsure reported £300m GWP for 2009 after adding more than 35 brokers to its ranks, taking its total member offices beyond 200, and spreading its footprint as far north as Stirling in Scotland.

Key talking point
Heath Lambert became the latest major broker to refinance in September, signing a £24m deal with banking group Santander. The London market broker secured the facility "at a much more advantageous rate", chief executive officer Adrian Colosso confirmed.

Then, as the year entered its final quarter, IAG's new UK chief executive Ian Foy announced himself to the UK market through Barnett & Barnett's acquisition of personal lines specialist NBJ in October.

Regulation, hardly the most popular issue among brokers, was a key talking point once again in 2010. In January, the Financial Services Authority made client money a number one priority for the year, sending out a 'Dear CEO' letter warning insurance brokers they would face "intensive" and intrusive" supervision. Findings from the FSA's accompanying 24-page client money and asset report highlighted "poor practice" in the handling of assets, the regulator said.

Lyndon Wood, chief executive at Moorhouse, says brokers are disgruntled with many aspects of the regulatory regime: "Generally, insurance brokers have got enough on their plate without having to fork out more costs. It is one of those areas where brokers will have to wait and see what happens."

Stuart Reid, chief executive at Bluefin, adds: "The regulators have been active - and not just on client money. We have all seen a higher degree of scrutiny. The demands made on businesses like ourselves we can deal with. But if that scrutiny is put on small firms, it would be a very heavy weight for them to bear. It is the most expensive [regime] I have seen in my lifetime."

Eric Galbraith, CEO of the British Insurance Brokers' Association, believes 2011 will be crucial in terms of getting brokers' voices across: "This is our opportunity to sit down and work something out that is not disproportionate. We need the right regulation."

In February, brokers were once again united against regulatory intrusion. The FSA revealed a 9.9% increase in funding requirements for the financial year 2010/2011 from £413.8m to £454.7m. Cue an indignant response from the trade bodies. Mr Galbraith called the minimum fee increase to £1000 "disproportionate"; the Institute of Insurance Brokers declared it "very disappointing"; while the Association of British Insurers found it "difficult to see the justification".

The May election, which resulted in the Lib-Con coalition government, would later see the proposal of two bodies to run the rule over the financial services market: the Prudential Regulation Authority and the Consumer Protection & Markets Authority — where brokers are likely to be regulated separately from insurers and banks.

2010 has also seen some adverse developments for personal lines intermediaries.

In August, NIG announced its withdrawal from the market but brokers including MCE's Julian Edwards insisted appetite remained in the market: "It is never a good day when a player exits the market, whether it is a big insurer or a fringe player." This development was followed in November, when Hastings pulled its insurer partner Advantage from external broker business — another firm to be added to the personal lines graveyard.

Meanwhile, the commercial broking market was hit in March when the Irish regulator placed Quinn Insurance into administration, banning it from writing new business in the UK market. Among the areas most severely impacted was the solicitors' professional indemnity market, with broker Marsh showing concern: "Since Quinn's UK branch is now closed to new business, an already hard insurance market for small law firms is certain to become much tighter." In April, Post revealed solicitors' PI broker Prime Professions had swiftly taken drastic action, changing provider to Travelers.

In other areas, June saw parts of the broking industry take a stand against covenant breaches — with Bollington chairman and Biba Greater Manchester and West Pennine chairman Paul Moors calling for a "code of conduct" to reduce legal bills and reduce costly court battles. However, the call has not been implemented, and later in the year, developments indicated the issue was far from over.

Breaching covenants is an inherent problem within the market, according to Ms Blanc: "I think it is wrong. It should not be tolerated — and, as a matter of policy, we do not allow it to happen." Mr Reid agrees: "It is a source of frustration for brokers who have purchased others. To receive good money for your business then leave and take it back displays a lack of integrity."

In probably the most dramatic development, July saw Aon and Marsh embroiled in a high court battle over a former Marsh employee. Euan Nicholson a senior energy broker, now at Aon, had been accused of breaking terms of gardening leave — and disposing of evidence in a case that became known as the 'laptop in the pond' case. And the issue of restrictive covenants came to the fore again in November after it emerged Towergate was mulling legal action over a team of former employees that left its Hertfordshire operation.

Continued difficulty
Clearly, 2010 will be remembered as year of continued difficulty — yet hardly an uneventful affair. Some market figures believe 2011 may be the year when smaller independent brokers bounce back.

According to some of the larger firms, next year will see brokers strive to evolve their businesses, despite the "ongoing" recession. Mr Reid says: "It is up to us, as CEOs, to re-engineer our business to reflect the current environment. We have to make the most of the assets we've got, because ultimately I don't see the market changing."

Ms Blanc believes the next 12 months will root out firms without an adaptable game plan: "If you have a good business model, with lots of organic growth, 2011 will be an excellent year. If you are scrapping around with existing clients it will be difficult and you really will struggle."

In Mr Clark's view, the situation may improve more rapidly in the South of England, while brokers in the North will continue to encounter greater difficulties. He predicts a "long-term" soft market — and believes the recessionary environment will continue to hamper the sector: "There are three major issues: a fall in premium rates, loss of clients and lack of new business, and clients buying less cover."

With such deep-seated issues, 2011 could well prove to be all about survival of the fittest.

Three major deals
2 July — Kwik Fit Group confirmed it had entered into a binding agreement to sell its UK insurance business to Fortis UK in a £215m cash deal. Credit Suisse advised Kwik Fit in connection with the transaction. The group said the proceeds from its sale will be used to repay debt which, together with funds injected into the business as part of the recently completed covenant reset exercise, would reduce net bank debt to £486m.

28 July — Ink Underwriting Agencies managing director Mike Smith travelled the breadth of the UK to secure the acquisition of £300m gross written premium broker network Westinsure. 100% of shareholders eventually approved the deal and it was completed for an undisclosed sum.

26 October — IAG UK-owned broker Barnett & Barnett grew to £50m gross written premium, by acquiring commercial and personal lines specialist NBJ. The deal was the first acquisition for Barnett & Barnett since it was acquired by IAG UK in March 2008. Having combined NBJ's £20m-plus GWP with its own, Middlesex-based Barnett & Barnett now sits among the top 25 independent brokers in the UK, according to the annual rankings compiled by Post's sister title Insurance Age.

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