Briefing: Is Ardonagh planning divestment following internal restructure?

By Editor Katie Scott

The volume of industry chatter surrounding intermediary organisation The Ardonagh Group has always been at a high pitch thanks to its history of high borrowing and having an acquisitive strategy.

However, this noise has cranked up a few significant notches since the business published its 2022 quarter three financial results last November.

Amid its financial report reveal, covering the year to 30 September 2022, news broke that The Ardonagh Group had conducted an internal reshuffle in October 2022, deconstructing the component parts of MGA Geo Underwriting to now sit underneath either its retail, personal lines arm – which is led by division chief executive Ian Donaldson – or its commercial and SME focused entity, Ardonagh Advisory, which is spearheaded by chief executive Rob Worrell.

Insurance Times understands that the commercial and SME MGAs under Geo Underwriting will be independently led by the MGA’s chief executive Jaime Swindle, while personal lines focused MGAs Midas and Uris will be headed up by Derek Coles, retail MGA chief executive, and will operate alongside Ardonagh Retail’s Atlanta brand.

Confidential chats with industry insiders indicate that this move to change Geo Underwriting from a horizontal, cross-division, separate MGA business to more neatly fit into vertical pillars could be a sign that The Ardonagh Group is looking to potentially sell off a branch of its business in order to mitigate any cash flow niggles amid the current cost of living crisis, rising interest rates and the high cost of debt.

An alternative explanation for the restructure, however, could centre around clarifying The Ardonagh Group’s entities by aligning specific MGAs with the intermediary’s core lines of business, to better demonstrate the value each component of the business can offer.

In turn, this could make the intermediary easier to run from a management perspective and could generate greater returns for the business.

Concerning cash flow?

On 2 February 2023, the Bank of England increased the bank interest rate by 0.5 percentage points to reach 4%. The BBC wrote at this time that this rate was now at its “highest level” in 14 years, which could impact on borrowers.

This update would certainly have been pertinent for many within the broking community, especially considering the amount of private equity backed consolidation that has taken place recently.

Due to its size and scale, however – The Ardonagh Group does employ 9,000 staff across 150 locations after all – it has become a more visible example of how interest rates could affect brokers’ businesses.

Within its Q3 results, for example, the intermediary reported that it had £2,814.2m in total gross secured debt as of 30 September 2022, with most of these facilities due in 2026 or 2027.

Its interim consolidated statement of profit or loss and other comprehensive income additionally confirmed that The Ardonagh Group recorded a total comprehensive loss for the period ending 30 September 2022 of £142.6m, while its net cash outflow from financing activities – which includes debt transaction costs and the interest paid on borrowing – amounted to £131.7m for the same reporting period.

The document revealed that a key risk for The Ardonagh Group is “stressed cash flow forecasts over [the] calendar years 2022 and 2023”.

Although my sources tell me that the industry generally has no concerns over the viability of The Ardonagh Group as a business - it did report liquidity of £795m in the year to 30 September 2022, as well as a 34% growth in income and a 20% improvement in adjusted earnings before interest, taxes, depreciation and amortisation – they do believe there could be question marks over its future as a borrower of money.

Therefore, shareholders may start applying pressure on the business to reduce the cost of its debt and improve cash flow.

Ardonagh’s possible options

My contacts explained that there are two main ways The Ardonagh Group could mitigate these possible queries from shareholders.

Firstly, the group could refinance to get improved or fixed terms. One industry professional I spoke to said The Ardonagh Group had already achieved this and would shortly be announcing good news here.

Its November Q3 report noted: “As at the reporting date, 41% of group debt is at fixed interest rates to January 2023 and 36% for the next three years.”

Option number two, according to industry commentators, would see The Ardonagh Group divest of one of its business arms – this strategy is strongly supported by the intermediary’s recent recalibration of Geo Underwriting, these commentators told me, as it cleverly compiles vertical, neat pipelines that can be dispensed with easily – and for a larger multiples considering the added MGA element the divisions now include.

One source confirmed to me that although a business he is involved in has been approached by The Ardonagh Group to discuss a possible acquisition, the intermediary has since not been able to make time to take the conversation further. He believes this is because it has been engrossed in its own possible sale plans, rather than looking to buy.

Crystal ball gazing

Whether The Ardonagh Group did restructure its business in order to sell a component of it is still purely speculation at this point – my sources agreed that there is an element of crystal ball gazing to their predictions. However, they also seemed fairly confident that the indicators they had seen so far from the company did strongly hint at this strategy.

Only time will tell whether this particular nugget of gossip comes to fruition - but judging by the frequency of conversations in the market, The Ardonagh Group will likely have to make its intentions or actions clear sooner rather than later as most industry birdies are currently singing to the same hymn sheet.

When I asked, The Ardonagh Group declined to comment on this story.