A welcome dose of optimism

F or the first time in five years the aggregate brokerage income of the top 50 has increased – by 14% to £5.26bn. It’s been a long time coming, considering the buying activity of the past four years, a period over which the aggregate revenue stayed remarkably stable at around £4.5bn.

Even more marked is the fact that it is brokers in positions five to 15 that have grown in stature compared to five years ago, while those in the top three or four slots have seen an effective decline in their share of the top 50 revenue, down from 44.6% in the 2004 top 50 to 27.1% this year.

Does this mean that less business is coming to London, not leaving local markets, and/or that more business is going to Bermuda? In aggregate, London brokers now represent 59% of the top 50 revenue, down from 65.7% last year and 77.9% five years ago.

Obviously, softening rates have had their impact on the delay in seeing this aggregate increase, but no one would call 2007 a year anything other than one of continuing soft markets.

Acquisitions during 2007 have, however, been on a scale not seen for a long while. The AA merger with Saga was the largest to impact the sector, followed by Towergate’s acquisitions (even with the IT side of Open GI omitted from its figures).

The consolidators have been extremely busy, given a boost by the Chancellor in the latter part of 2007 with the closing down of the attractive capital gains tax regime.

The rankings

Not only have we seen growth but this growth has upset the traditional rankings. Saga/AA is now the third largest broker in the UK, pipping Willis to this position by a short head, £7.4m on an annualised basis, and leapfrogging JLT and Towergate in the process. The latter stays at number six, ousting Benfield. JLT will need to look to its number five position next year if the acquisition trail at Towergate stays alive.

CCV enters the rankings for the first time at 23 and Hero re-enters the rankings at 36 after being absent last year during its reorganisation. Meanwhile, total newcomer Adrian Flux, the specialist motor broker, which has kept its light well hidden, is in at 38.

We are already expecting other newcomers to the table next year, unless they become acquisition targets before they get there; Cobra, having achieved excellent growth was just outside this year’s top 50, and looks as if it may be acquired before it makes it in its own right, so it could be left to the likes of Academy and CBG to keep up their growth and acquisitions and be next year’s newcomers.

Growth

Looking at growth by sector confirms the acquisition path – the commercial sector continues to lead the way with aggregate revenue up by 63% compared to last year at 40%. Commercial revenues now represent 15.3% of the top 50 revenue compared to 10.4 last year and 7.8% five years ago.

Leading this commercial charge in absolute terms is Towergate at £118m, with Venture Preference and Oval following close behind with growth of £53.5m and £33.2m respectively.

Heading the relative growth table is a surprise entry with Bollington at 117%, a newcomer to the table following its acquisition by Groupama and utilisation of its support for other acquisitions. Following close behind is Giles with growth of 69% and the promise of much more to come, with its major private equity backing from Charterhouse.

In personal lines the AA/Saga merger obviously stands out as the major acquisition but it is the non-corporate acquisition growth that stands out here with BGL and Swinton achieving growth rates of 43% and 37.4% respectively. This is somewhat unexpected as premium rates have been soft and the aggregator websites have made life even more price-competitive. So growth at this level means that someone has been losing out – but who? The answer is not obvious.

The London and international sector remains in the doldrums; its growth has been minimal for a number of years and 2007 saw it suffer an overall decline of 1.1%. This is a more complex sector than the others and while there were acquisitions – of PWS by THB and Cooper Gay making a number of discrete buys – overall, the sector has witnessed restructuring and the continued impact of the 2005 catastrophe losses on its profit-related income.

Highlights in the sector are the organic growth seen at a number of medium-sized brokers, RFIB at 17%, Windsor at 15.8%, RK Harrison at 15.5% and Hyperion at 14.7%, and the final emergence of corporate activity with JLT acquiring HWS and Willis acquiring HRH in 2008.

The London sector has also seen a newcomer to its ranks, Kerry London, entering the table at number 42, following its growth of 55.7%.

Profitability margin

We all like to see profits but the only truly comparable figure is the profit margin. Saga/AA comes out well ahead of anyone else on this measure at 52%, a stunning number, supported by the whole group’s figures announced in July of 32.3% at the EBITDA level. However, Acromas – the AA and Saga’s holding company – made a pre-tax loss of £255.7m due to the cost of the merger and continuing financing costs. As such, these broking figures are probably misleading in making a fair comparison to other brokers’ margins.

Second in the table is Towergate with a 39.8% EBITA margin, that is before any amortisation of goodwill. This is a clear demonstration of the power of re-engineering businesses and obtaining better rewards from insurers for doing as much work as they will allow them to do.

Third in the table is Erinaceous and it was no wonder that the banks were keen to get this business into a new company under their control when the property-based parent got into trouble. With the original parent company in difficulties, however, it is unlikely that business volumes will continue at historic levels and thus margins will fall.

Fourth is Windsor, a consistent good performer in this category and probably the ‘truest’ margin in the top positions. This is a reflection of the good management of the business and focus on better margin business.

Fifth in the table is CCV with an operating profit margin of 28%, following in the footsteps of Towergate. After this there are a clutch of businesses at the 25% level which has to be setting the benchmark for all other companies to achieve. Willis, Cooper Gay and JLT all score well with margins of 20% and 25% showing that it can be done no matter what your scale.

Improvement

There are also those who have been able to significantly improve their margins in the past year. We have excluded the top two – Heath Lambert and Cooper Gay – as they were both recovering from difficult earlier years so their improvement was well into the hundreds of percent. Topping the table is Hero, the Highway Insurance broking business, which was consolidated into one company and is clearly showing the benefit of this. This improvement should, however, be qualified by the fact that the margin for this year is only 5.9%. Aon’s improvement is a surprise and moves it from a 7.2% to an 18.3% margin – very much approaching the benchmark rate of 25%.

It should be noted that there are only two consolidators in this list achieving around 20% improvements and this could be because the big improvements happen early on with the longer run ones being less dramatic and dependent on management of the integration process.

Employees

While technology has allowed a number of activities to be systemised, this has not been consistently achieved across the broking market.

London and international brokers, not surprisingly, remain dominant at the top of the income per employee table but it is Erinaceous that is an unexpected feature in third place; for how much longer we would not like to predict.

Personal lines and volume-oriented operations should probably have benefited most from systemisation. This, however, is only marginally supported by their presence in the increases in income per employee chart. Group Direct and Budget have made excellent improvements, with Kwik-Fit, Swinton and RIAS close behind.

As with all innovations, significant improvements only come along once in a while – the rest is down to gradual improvement and polishing existing procedures.