More than just capital - the private equity firm seeking to grow its insurance portfolio

Utter the words ‘private equity’ in a public forum and more often than not familiar tropes will surface – that of the nefarious, shadowy entity aggressively stripping the assets of good, honest businesses.

But while this has and does happen, the reality is that private equity can often be an invaluable source of funds for businesses looking to grow and remain independent.

A case in point is Inflexion, which now has three insurance businesses under its belt… and counting.

Inflexion was behind the simultaneous buyout and merger of northern brokers Bollington and Wilsons in 2017.

It also bought a minority stake in integrated insurer Granite Underwriting at the end of last year, adding to its first purchase – telematics broker MyPolicy.

Founded in 1999 as a startup by John Hartz and Simon Turner, the firm now employs over 100 people, and has the firepower to invest anywhere from £10m to £250m into majority or minor situations.

The types of deals it looks for include those that generate revenue growth, either through opportunities to increase market share or growth against competitors.

“We are a growth investor”, partner John Harper, who oversees the insurance portfolio told Insurance Times.

“We look at profit margins – so EBITDA margins 15-20% plus. We use that as a proxy for the value that people place on a company’s goods and services”, he added.

More than just capital

Those are the financial characteristics. More broadly, Inflexion tries to bring a lot more to companies than just capital.

It employs two digital directors who are tasked with helping its portfolio businesses optimise technology opportunities.

“In our market there’s no such thing as a company that has got its technology perfect. There’s always ways to drive efficiency, drive customer improvement, take cost out and launch into new markets”, Harper said.

Inflexion’s gateway into the world of insurance began with MyPolicy – a small telematics broker originally geared towards the young driver market.

The firm stepped to help it with its succession plan and has since expanded its product range in a growing market.

Next came Bollington Wilson. The two businesses were put into a new headquarters and given new systems. The integration is now complete, and the business is now actively seeking M&A opportunities in the market, Harper said.

He described the Top-50 broker as a “platform for bolt-on acquisitions” – both broker and MGA, the latter of which already form part of its stable.

Consolidation

“We’ve often thought that the whole market consolidation still has some way to run,” Harper said.

“As the other brokers push up in scale, we think there’s an opportunity for Bollington Wilson to be playing in the local market and further afield, perhaps at a scale where some of the bigger guys cannot.”

In terms of who calls the shots when it comes to making those acquisitions, Harper said that lies with Paul Moors, Bollington’s chief executive.

Inflexion’s role is to provide strategic support. “There will be conversations going on all the time about joining forces, and since we’ve put the business together, they’ve now got the firepower to do that, whereas before, they didn’t,” Harper added.

Inflexion also makes use of its advisor network to spot potential acquisition targets. There’s a constant stream of businesses that they look at, Harper explained. “The advisors will often bring these suggestions to us, and we’ll say ‘go and speak to Paul [Moors]’.“

Often Inflexion (or Bollington by proxy) will step in when a broker is seeking to execute a succession plan.

“Life has got tougher for small brokers because of regulation. Everything is more expensive and more time-consuming. Technology is also driving this consolidation and Bollington wants to take part in that.

“We’re about two years into the investment and there’s plenty of runway to be part of that consolidation,” Harper added.

Granite

The third string in Inflexion’s insurance bow is Granite Underwriting, which Harper describes as an “interesting” business with a relatively low profile considering its size (it wrote £240m GWP in 2018).

It has an unusual business model as is regarded as an integrated insurer. It has distribution (it’s on aggregators). It gets a third of its business via wholesale brokers, and has its own network of offices, including 10 regional hubs, which mainly cater to the taxi market.

It owns the front end of its distribution through its own Gibraltar underwriter – Haven. All of the business generated through the distribution arm is placed with Haven. It’s not broked to any third parties, Harper explained.

“Granite does the whole value chain. It distributes, it does underwriting, and claims management,” the latter being the largest part of its business. It also does its own premium financing.

Granite is the UK’s biggest taxi insurer (black cab, Uber and private hire), with a 25% chunk of the market.

It has 25-years worth of data and claims experience behind it, as well as a high renewal rate. It specialises in high-risk post code and low or no no claims discount business.

To mitigate the high-risk nature of this type of business, Granite invests heavily in front-end validation. It speaks to the customer and try to verify information they provide. If the information turns out to be incorrect, Granite requotes it or withdraws cover.

Yet, Harper repeated the well-known mantra that there’s “no such thing as a bad risk, just a mis-priced risk. It’s about making sure the price for that individual is appropriate.”

Averages are deceptive

Overall, the £14bn motor market (which includes taxi) has been static for some time. At first, a market which had reported combined ratios of over 100 for 19 of the past 20 years did not seem like a great proposition for a growth investor.

Looking from the outside in it looks “inherently unprofitable”, Harper said. But what has become clear through our work with Granite is averages are deceptive.

“The market might be barely profitable, or unprofitable, but within that you’ve got a spread of winners and losers.

“A lot of players consistently unprofitable on the underwriting side, but Granite and some of the more nimble, emerging players are consistently profitable with their underwriting and as a whole in terms of other income.”

Shift away from legacy players

Inflexion was also attracted to Granite because of its potential for growth, Harper said. He pointed out that there had been a shift in business from legacy players such as composite insurers to emerging businesses, such as Admiral and Hastings, as well as Granite.

“The emerging players have the most up to date technology. They aren’t burdened by legacy, unprofitable back-books. They are much more nimble and agile.

“An example is Granite being able to change the price almost immediately based on data from within its own eco-system and target individual risks in some cases.

“A lot of the bigger guys just don’t have this capability because they are just brokers or just underwriters, or their systems don’t allow them to operate that way.”

Embracing regulation

When it comes to the obstacles presented by regulation, Harper takes a pragmatic approach.

“A lot of people across the industry moan about it. Our view is that moaning doesn’t do any good. Regulation is here to stay. It is there for a purpose - to protect people and make sure there’s a level playing field.”

Inflexion’s attitude is to “embrace” regulation and compliance, and Harper believes the whiplash reforms and the dual pricing crack down will shake out the industry.

“The direction of travel is clear. The reforms will reshape people’s business models,” he predicted.

He explained that Granite never had a dual pricing policy and prices for a particular risk and the year it writes.

“We see it as an opportunity. It ought to level out pricing and also encourage people to shop around more and switch, which means more opportunities to acquire new customers.”

Regulation can be a positive force, he explained. It’s another factor that he believes will drive consolidation opportunities for the likes of Bollington.

For example, a small [broker or MGA] might not be able to afford to invest what they need to do stay compliant. That presents an opportunity for them to be folded into a bigger group like Bollington Wilson and spread the load.

Inflexion’s success in the insurance sector has given it an appetite for further acquisitions in the sector.

Its current portfolio is relatively diverse: A personal and commercial lines broker/MGA in the northwest, but with a national footprint; a specialist business in MyPolicy, and a full-value chain specialised player in the private car market.

Each sit in a different fund and are fully invested.

The firm has three current funds, none of which has any insurance assets, so there’s no fund restrictions.

Inflexion has raised £3.25bn in 19 months, giving it ample firepower to dip into the broker M&A area again, harper said. It has looked at commercial and personal lines, Lloyd’s and high street brokers as potential acquisition targets.

The MGA market is also of interest to the firm. “Granite was first time we had done a risk-bearing deal. We’re not actively looking for pure carrier plays.

“We’re not going to invest directly into a syndicate or a balance sheet insurer. But given that we’ve done Granite and we like what we see, capacity or underwriting as part of a more integrated group is of real interest,” Harper added.

Expectations

Has the insurance market gone the way that Inflexion expected? What surprised Harper is the amount of capital that has come in and where valuations of brokers have got to. For him, the prices reflect that there’s still a long way to go in this consolidation cycle.

“One has to be mindful of those valuations. A lot has to go right if you’re paying a full price for a platform to generate a private equity return.”

Harper was also taken aback by the lack of adoption of technology by some of the market’s big players.

“It’s probably been slower to be adopted by the industry than one might have expected. A lot of large established players still not embracing technology.

“Insurance is and can be a conservative market. A lot comes with that. Many do business a certain way because that’s how they’ve always done it. They’ve been successful over the years and have big customer bases and a lot of inertia.

“Technology has been fairly patchy in its adoption. That has surprised me, but it also presents an opportunity for challengers to come in and disrupt models.”

Exit route

Private equity firms typically hold an asset for about five years, and Inflexion is no different.

“It’s a healthy block of time. Enough to be able to really support change in the business and position the assets for a full or partial sale. But it’s not too long that the management teams feel the next goal is unattainable,” Harper said.

“In some cases, we will build for longer because the market’s great and we ride our winners. it’s a big deep exit market with lots of different exit routes and we don’t see any reason to change the core timeline,” he concluded.