Adding – and quantifying – value

As part of IMAS’s annual top 50 broker review (due to be published in association with Insurance Times in August), we identify which companies the firm believes have added the most shareholder value in the past year.

Looking at the winners for the last four years shows a game of two parts. In 2005 and 2006 consolidators came top, while in 2007 and 2008 the gong went to the businesses who had been growing their profits organically, if not their turnover, although Aon has subsequently purchased Benfield.

Looking at all those who have been on the podium, it is interesting to note that a wide variety of companies are represented. The list contains both very large and relatively modest-sized businesses; personal lines and Lloyd’s brokers are present, as well as the commercial community.

A numbers game

“If it is not measured, is it not managed” is a well-known management maxim. Whilst private companies should be trying to maximise shareholder value, as quoted ones do instinctively, in reality it is extremely difficult as there is no matrix to monitor.

Some of the worst management decisions we have seen in the insurance broking sector have been based on the view, wholly misguided in our opinion, that valuations are driven by turnover (vanity) when a far more important factor is profitability (sanity). Whilst brokerage as a proxy for value may be partially true for the smaller brokers who are likely to be subsumed into larger entities, this proxy runs out very quickly as size increases.

And whilst profit is clearly a key factor, too often people look inward, ignoring the old adage that a business is only worth what somebody else is willing to pay for it. The other key insight is that at an auction one only discovers what the underbidder is willing to pay, not what the actual bidder was willing to pay. Consequently, to extract full value it is not sufficient to have one keen buyer. It is the underbidder (real or, in some cases, perceived) that sets the value.

The reason for having a section on shareholder value in our ‘top 50’ publication is to highlight the issue and encourage companies to discuss and develop their thinking on this matter. If one is not actively maximising shareholder value, then one is passively reducing it.

The front-runners

We are still getting financial information from the top 50 companies, but the current contenders, from which the winner and two runner-ups will be selected, are as shown in the box, above.

As well as naming the winners, we will look at each of the candidates, commenting on why they are worthy of consideration for adding the greatest amount of shareholder value since the last publication. Aon has grabbed the headlines for its mega-deal with Benfield, but history suggests that such transactions can destroy as much value as they create. Often it is the smaller companies that can transform the value of their businesses in a relatively short space of time.

Exit strategies

Unfortunately, shareholder value cannot be reduced to a single variable. A business with outstanding profitability may have failed to invest in the next tier of management and, whilst dominating its particular sector, can find itself with no platform to enter a new sector.

The only true test of shareholder value is on exit, which can often be hard to achieve. For a number of the consolidators, this is becoming very apparent. Given the importance of the issue, boards should spend far more time focused on planning an exit; otherwise, they may find they have the time to repent at their leisure.