Enough is enough

It seems strange that Erinaceous is named after an animal that often comes to an untimely end while crossing the road. Yet a closer look suggests that the parallels with spikes, prickles and journeys fraught with peril are remarkably apt. The Erinaceous group appears ready to offer up its jewel in the crown, the insurance business, EIS.

As a result, Leslie Goodman is a busy man. Barely three months into his tenure, the executive chairman of EIS, the most profitable part of the property services group, is in the midst of a review of his business, with speculation rife that it is set to be sold off to an insurer.

In an exclusive interview, Goodman defended the business against its detractors and outlined the options for its future.

The fate of EIS has hung in the balance since September, when the parent group delayed the release of its interim results and warned of a “material concern” that it might not be able to realise its assets and discharge its liabilities.

Enter the consultants, in the form of KPMG and Close Brothers. And then, in November, exit the founding members, leading shareholders, and chairman and chief operating officer Neil Bellis and Lucy Cummings.

Several months down the line, and a new management team in place at EIS, the group revealed it had appointed Deloitte to advise on the company’s options – including a sale – after it received approaches from a number of interested parties, including insurers, brokers and private equity sources.

Under fire
Yet despite the interest, EIS is under fire. Regarded by many as a market leading broker, controlling premiums in the region of £150m, it has been labelled by some as an organisation losing confidence, direction and, ultimately, business.

Critics claim that the loss of personnel both across the group and within EIS have impacted directly on its business, contributing to a fall in profits of 40% in its interim results.

But Goodman is defiant, playing down the impact of the depatures, while emphasising the underlying strength of the business that led to revenues holding steady in the first half of last year.

First, he tackles the slew of senior resignations and the loss of two sales teams, beginning in July when it was revealed that chief executive Andy Halstead, and director of insurance and underwriting Nick Crocker had handed in their notices.

Other key departures since have been managing director of EIS-owned Keelan Westall, Ashley Canning, and intermediary sales director Wayne Tonge. With the exception of Canning, all have moved to UK consolidator-in-chief, Towergate, whose total EIS haul stands at 19.

One broker chief executive explains: “EIS has lost a lot of its big hitters. These people are key for dealing with the larger corporate clients. I’m sure some of the departures were easy considering the state it was in.”

&#8220Towergate cant squeeze any more out of the business. It wouldnt fit its model.

Chief Executive, Lloyd’s broker

Goodman is sanguine in his assessment. “There will always be a turnover,” he says. “But those who left have been replaced. Some of them will not be missed. And we’re looking to add more staff, starting at Homelet.”

Other sources close to EIS are quick to question its sustainability following the loss of key fee earners, such as business development directors Andy Poole and Simon Millar, who have left EIS for rival brokers Miles Smith and Lockton. “In all professional industries, your status is based on the business you bring in, not what you service,” comments Chris Hitchings, analyst at Keefe, Bruyette & Woods.

But a senior source at a major commercial insurer says that he has no knowledge of EIS losing business as a result of the group’s difficulties or the loss of staff.

“It continues to trade well, and has retained its client base. I see no evidence it is losing major clients, nor of the business receding.”

He adds: “It has key people in its retail business. The loss of staff issue has been overplayed.”

With one eye on a potential sale, Goodman is understandably anxious to distinguish EIS from its now notorious parent company. He acknowledges that Erinaceous’s woes have had an impact, but insists that EIS is ring-fenced from the group.

“The business has stabilised considerably in recent months,” he says. “With each day that passes, this becomes less and less of an issue.”

He dismisses claims that the faltering Erinaceous brand has impacted on the insurance business, adding: “We don’t trade as Erinaceous. Focus on the brands: Farr, Deacon, Keelan Westall – all of which are strong.”

To cross-sell, or not to cross-sell?
Sources close to the business, however, maintain that the strength of the individual brands are not as relevant as the business performance of the group. “EIS has huge exposure right now. The group’s property customers are captive customers of EIS,” says one source.

“There is big connectivity between the insurance and commercial property management parts of the group,” says another. “It is driven by synergies between the two. Part of the business model, based on the selling of the property insurance to property owners, was aggregating margins across the portfolio. The problem with that approach is few properties get their services from one source. You can’t completely cross-sell.”

EIS, however, claims that less than 10% of its business originates from the wider group. Goodman points out that the company intends to capitalise on opportunities to cross-sell within its insurance business, as well as across the group.

He points out that penetration rates at Lumley Letsure (which the company bought in March last year) for rental guarantee and tenant’s contents currently stand at just 10% and 2%, respectively – a figure that will rise as it become more closely integrated with Homelet. Indeed, integration is clearly key to EIS’s strategy, and its future.

&#8220EIS has lost a lot of its big hitters. These people are key for dealing with the larger corporate clients.

chief executive of a leading broker

And with that future firmly in mind, Goodman is at pains to emphasise that a sale is not the only possibility.

Other options include a debt-for-equity swap, which would see the group’s banks, HBOS, Lloyd’s and HSBC taking a larger stake in the company, or holding on to the business with the view of reinvesting profits.

The glamourous option
“A sale is the glamourous option,” he says. “But maybe now is not the right time. If a prospective buyer doesn’t meet our expectations, we won’t sell.”

Ultimately, that decision will be the Erinaceous boards’ to make. And with debts of over £200m to manage, making some ready money must seem an attractive option – especially if reports that interested parties are considering bids in excess of £100m are to be believed.

Though the banks remain willing to lend – a condition outlined by the group in its interims as vital to its survival – the group is paying punitive interest of 10% on its loans.

So which potential suitors are lining up? Though the Towergate has, and will continue, to play its part in the EIS story most sources, including the chief executive of a Lloyd’s broker believes it is unlikely to buy it. “Towergate can’t squeeze any more out of the business,” he says. “It wouldn’t fit its model. It has got to be an insurer.”

Another Lloyd’s broker says: “Any one of the big five insurers could make a strong case for buying the business. It makes sense to concentrate profitable business through your own underwriting.”

Of the insurers, though AXA has previously been the most strongly linked to EIS, it is Zurich that is topping most tipsters’ lists. Already a major trading partner with EIS, Zurich and EIS-owned Farr are ranked one and two by market share in the social housing market.

A source close to the insurer says: “Zurich has a large property investors business. Endsleigh is also a big player in the tenant referencing market, where Homelet is the leader. It would be a good fit for them.”

Goodman says he expects significant developments by the end of next month, during which time the company’s 2007 results will be released.

In the meantime, whatever lies along the difficult road ahead for EIS and its teetering parent, he is determined to keep fighting.

“We have kept a low profile in recent months,” Goodman explains. “It hasn’t worked. This is a competitive market, and our competitors will look to gain an advantage and take some of our business – by fair means or foul.”

He adds, with a twinkle in his eye: “But we have some ideas of our own. There will come a time when we will take the fight to them.”