Raiding the front line

The past months have seen a frenzy of merger and acquisition activity in the broker market. In December alone over £1bn of gross written premium is thought to have been consolidated, with the total for January already reaching around £200m.

The nature of the consolidation is also changing. The buyers are no longer just large regional brokers such as Smart & Cook, Oval or Towergate - insurers are seeing the benefits of owning intermediaries.

Last week, AXA took the bold step of buying two regional heavyweights - Stuart Alexander and Layton Blackham following in the footsteps of fellow insurers Groupama (which bought Carole Nash), Royal & SunAlliance (Martello) and Allianz Cornhill (Home & Legacy).

Nobody could have anticipated the rush of merger and acquisition activity which the market has seen in the past six months. To give some idea, 12 months ago Insurance Times featured an article from seven leading independent brokers who rebuffed the threat of commission disclosure.

Since then five of the letter's seven signatories have either been sold or rumours are circulating about their imminent sale.

And the recent moves by insurers to buy intermediaries have prompted speculation of a further acceleration in consolidation.

"Every other insurer will be trying to persuade other big brokers to sell in a bid to save their revenue from declining," says Grant Ellis, chief executive of the Broker Network. "It is bound to raise the game of insurers."

Already stockbrokers looking for prospective purchases have contacted several brokers.

A senior broking source says: "We could even get some interest from companies outside the market. They will be looking at AXA to see what it is going to do with this deal, and asking whether brokers are the 'must have' accessory for 2007."

For those consolidators left in the market what else is there left to buy? Smart & Cook is the first name mentioned as a potential target.

The north Yorkshire broker has long been touted as a target of Towergate, but its chief executive, Paul Meehan, has steadfastly refused to comment on such matters. Whether its private equity backer, 3i, would be interested in a sale in 2007 as broker values hit a high is another matter.

Budget Group director Mathew Donaldson says the rivate equity companies backing many brokers will look to take advantage of their investments' soaring values and sell. "Private equity houses are going to cash in this year. The true value of the distribution chain has been realised."

Recent months have seen venture capital firms offload their stakes in brokers, including Alchemy Partners' disposal of Open + Direct last week and Sand Aire Private Equity selling its share of Home & Legacy.

Future turmoil
With insurers moving into distribution through broker acquisitions, independent brokers will now effectively be fighting insurers for business. Will this plant the seed of future turmoil?

Donaldson says not. He argues that for Budget it will create a wealth of new business as consumers opt for the independent broker. "Insurers and distribution are like oil and water," he says. "We are delighted because it is ideal for us. The demise of the independent intermediary will be negative for the consumer, but we can offer an alternative."

And Ellis says: "This is a complete and utter departure from where we were. You can imagine that in insurer board rooms everywhere people are discussing what to do next, but it won't affect us because we are going after the smaller acquisitions."

Jelf Group chief executive Alex Alway adds that insurers that distribute will, undoubtedly, face problems. He asks: "How are they going to make economic worth? For us it will mean we move much higher up the league of independent brokers."

With private equity houses moving in and out of the broking market, insurers digging in their heels and independent brokers preparing to fight back, it seems that insurance distribution is changing.

This time, however, insurers will play a much more significant role in the 2007 revolution. IT