Share jitters fuel broking boom

Weeks of bloodletting on the stock markets have been slashing stock values - and insurers have been among the worst fallers.

Doom and gloom have become par for the course as office pundits argue over how long the bear market will last. But one expert argues that the slumping market is no bad thing for brokers.

Finger-pointing commentators have blamed the life industry for fuelling the downward spin. They say life insurers are having to offload their huge equity portfolios to shore up their solvency requirements.

As insurers own about a fifth of the shares traded on the London stock exchange, insurers have been in the limelight during the wild swings of recent months.

But general insurers do not face the same solvency requirements as life companies and some experts argue that for non-life operators and brokers, the stock slump is a positive opportunity.

Oliver Laughton-Scott, director of the insurance specialists IMAS Consultants, said: "The broking sector shouldn't be sharing in the gloom and doom with everybody else.

"The lower the stock market falls, the longer rates will be held up. It's going to underpin the long term strength of the sector. It's a golden opportunity for insurance brokers."

Paul Waterhouse, director of financial services at rating agency Standard & Poor's (S&P), says that even as far as general insurance is concerned, there could hardly be a better time for a crash.

He says: "If you could pick a good time for the stock market to have a problem, then this is it."

With the massive upswing in general insurance rates since 11 September, companies with general insurance business at least have an alternative source of income to the investment funds that have buoyed up their results in the past.

The problem is, many have huge losses to pay for and are desperate to plough as much cash as possible into underwriting while there are handsome profits to be made.

Waterhouse says that general insurers should be able to weather the storm as long as equity values rise by the time they need to pay out on claims.

He says: "General insurance claims are paid over a period of time. With motor, for example, it's about three or four years. With employers' liability (EL), it's 20 to 30.

"The drop in equities isn't a significant problem as long as it's only temporary."

Carolyn Rajaratnam, an associate at S&P, says the biggest drawback is the loss of financial flexibility that it causes.

The jittery markets both restrict the amount of money a company can raise and make it much more expensive.

Waterhouse says: "There's a lot of uncertainty at the moment. If a general insurance company approaches the market and says it would like to raise some money, it would be more expensive and it would raise less."

So plans to raise money, expand or float have been put on hold. Last month's postponed flotations of Heath Lambert and St Paul Companies' new reinsurance operation, Platinum Underwriters, are just two examples.

In addition, many of the big general insurers have life operations that are far more sensitive to the stock market. In the big composite insurance groups, this could be a drain on the general insurance side if the group management decide to use profits from the general side to shore up solvency on the life side.

Continuing decline
The bottom line is that Waterhouse doesn't expect downgrades in the general insurance sector as a result of falling stock markets ... yet.

He says: "If they fall and stay down, with a sustained period of continuing decline, that clearly would put pressures on earnings and on capital and could eventually lead to downgrades."

Meanwhile, Laughton-Scott sees continuing good news for brokers. He reasons that every fall of the stock market puts pressure on insurers to keep their rates high, to compensate for their falling investment income.

Brokers are also firmly part of the pre-dotcom era and benefit from being seen as safe, solid and easy to understand. Crucially, the nature of their business makes them counter-cyclical. After 11 September when insurers' stock slumped, investors snapped up broker stock, because they foresaw fat profits from high rates without the losses of the risk carriers.

Laughton-Scott says: "Although the stock markets have collapsed, one of the bright spots has been that the insurance broking market has been performing quite strongly.

"If rates double then brokers' income doubles and profits shoot up dramatically."

Privately owned
As soon as markets become steady again, the conditions will be right for companies such as Heath Lambert to attempt flotation.

Laughton-Scott says: "The vast majority of brokers are privately owned and it's vital that they think about how they maximise their own shareholder value to take advantage of the market."

He advises building a core quality in a chosen field and selling the business rather than hanging on too long. And he says it's wrong to think that a falling stock market means a broking business is losing value.

"People who don't follow the market carefully assume the value of their business will be going down. There is no suggestion that the collapse of the stock market will decrease brokers' wealth."

And there is the obvious opportunity to snap up high quality personnel.

"With the falls of the stock market and particularly the IT sector, we are seeing huge numbers of people becoming available," he says.

Oliver Laughton-Scott analyses why people-based businesses often fail to make as much money as they could when they are sold in a new report, "Destroy Shareholder Value in Six Easy Ways", published by IMAS to mark its tenth anniversary