Comment: Lost leader - why did Blanc exit Towergate?

Is this the beginning of the end of the consolidator business model?

That's the question on everyone’s lips after Towergate’s biggest star, deputy chief executive Amanda Blanc, jumped ship to join AXA as commercial boss.

Blanc defected with the consolidator's flotation just two years away, in which so much was on offer. She stood to gain a large financial reward and potentially take over the reins from current chief executive Andy Homer.

Furthermore, Towergate isn’t in bad shape. Its earnings are still healthy in tough trading conditions, it has a good relationship with its bankers, the underwriting arm has won the respect of its carriers and there is excitement over expanding PowerPlace into the broker community. So why the leap, and why now?

Contrary to expectations

Last month, Blanc laughed off talk of joining AXA, and the rest of the Towergate team must have felt confident that their commander-in-arms was staying put.

Fast forward three weeks, though, and everything is suddenly different.

Blanc has turned her back on Towergate, instead opting for security with AXA: a hefty salary with share options and a business backed by a mighty French parent.

But with the potential reward on offer from Towergate's planned IPO, one can't help but wonder how much faith Blanc had in Towergate and, indeed, the consolidator business model as a whole.

It also sends out a worrying message to the rest of the Towergate staff waiting for their rewards from the flotation.

So let’s look at three possible reasons why Blanc left.

1. Money worries

The first and most obvious challange facing Towergate is dealing with all that debt. For Towergate to pay off its debts – which by the most conservative estimates are around £480m - and reward its shareholders, including Blanc, the company needs a listing or a sale.

That has become increasingly difficult with the economy dragging its feet towards recovery. Sovereign debt and unrealised banking writedowns are also wearing heavily on investor appetite.

As a back-up policy to reshift debts and interest payments, Towergate attempted a £665m bond refinancing earlier this year, with repayment dates set for 2017 and 2018. But concerns over sovereign debt pushing up interest rates meant that plans had to be put on ice.

If the bond refinancing had succeeded, this could have meant the potential listing or sale being delayed for several more years. Blanc might have been unhappy about waiting around that long, or perhaps she didn’t have enough belief in Towergate’s financial juggling ability.

2. Sustainability

Secondly, there’s the wider issue of the consolidator business model itself. How much longer are insurers willing to pay high commission for big volumes?

Former Aviva chief executive Igal Mayer tried to pull things back and got his fingers burnt. His successor, Mark Hodges, has made a big effort to get back onside with Towergate, ploughing business back into the consolidator at more agreeable rates.

But there’s no doubt that, in a continuing soft market, the bigger insurers would like to pay lower commissions - and Hodges is shrewdly hedging his bets.

Aviva has made a big play in targeting the independent broker market, knowing the commissions they pay with the smaller guys are lower. Blanc, well known for her strategic foresight, may have worried that, in the long-run, the pendulum will swing back towards lower commissions for the consolidators. That would eat into margins, exerting huge pressure on the consolidator’s business model.

3. Lustre lost

Finally, there’s the threat that Towergate faces from the entrepreneurs who sold their businesses to the consolidator, but want to set up again once their restrictive covenants run out.

The continual grind of confronting these time-consuming challenges may have finally got to Blanc, which would only get worse upon slipping into Homer’s shoes.

Couple that with the effects of the depressed economy, which is making it much harder for Towergate to earn the revenues it had anticipated pre-2008. You can see now how the prospect of reviving the fortunes of a big-name insurer in the UK, working closer to home and spending more time with family, could be more appealing.

Beyond Towergate

All these challenges are not unique to Towergate, of course. Both Giles and Oval suffer from similar obstacles. (Bluefin is sheltered by its parent, AXA.)

The consolidators’ future is so up in the air, it’s impossible to predict. Their future could be the consolidation of consolidators, selling assets through deconsolidation, treading water until the economy picks up, or gunning for an early sale/flotation, which could still be successful. The bottom line is nobody really knows.

But for now it looks like Blanc wasn't willing to wait to find out. And when an intelligent and widely respected industry operator jumps ship, you have to wonder if this will one day be looked back upon as a defining moment for the consolidators.