The lure of small fish

Being an independent broker can feel like swimming in a shark pool. There are consolidators trying to swallow you whole, networks which want a bite of you, and insurers which will snap you up as soon as look at you.

But there is a way though. Brokers can stay independent and, having realised that rampant consolidation has its downsides, there are ever-increasing number of sources of funding available to those who wish to invest in their own independent future.

For insurers, the lesson has been “beware what you wish for”. The independent broker appeared to be a costly and inefficient trading model. There were thousands of tiny independent brokers working in their own way, each needing individual support, demanding tailored products and services and individual access to underwriters.

Surely, insurers thought, if there were far fewer brokers and they were larger, or they grouped together to provide much bigger operating units, then money could be saved.

But now they see the risks inherent in that. A cock-up in service standards, or an underwriting adjustment that led to a price hike, might have lost the business of one or two of those small-fry brokers before. But now, insurers have realised that when one of the consolidators or networks switches to a rival carrier, the loss of business could run into millions of pounds.

“Brokers are saying they have plenty of people interested in buying them.

Eric Galbraith

There is also the threat of a rival insurer actually buying a major broker outright.

All of a sudden those unpopular, inefficient, troublesome, little independent brokers look like being the lifeblood of the industry again. And insurers want to protect them.

Initially that appeared to mean insurers taking minority stakes in brokers – Norwich Union (NU) has snaffled up a little under 10% of both Jelf and most recently Giles – in which NU’s 7.5% stake, costing £5.2m, also swung the insurer a seat on the board. Allianz has 10% of Oval, with money it invested being used to buy other firms and to secure additional lending from Oval’s banks.

But loans to brokers look more likely in the future, as well as financial advice on such things as succession planning.

New NU chief executive Igal Mayer said recently that he wanted to help brokers secure the future of their businesses in other ways. “The aim is to help them to sell to their children or to the people in their office. And we can provide merger and acquisition support. We want to stay out of managing their businesses but we can help them to remain independent, which we believe is the best deal for customers,” he said.

“Little brokers can be absorbed easily into a local firm with no complications.

Andrew Paddick

Exactly how this will work is a secret. Despite making this announcement, NU refused to elaborate on what help it would provide, what sort of brokers it would support, what criteria it looks for and whether or not there would be any restrictive conditions on that support.

That bothers IIB director general Andrew Paddick. “The danger NU has is that if it lends a broker a sum of money to stay independent and that broker then builds up a big book of business with another insurer and turns round to NU and says ‘thanks but no thanks’ in terms of insurance, what happens to the loan? Are there going to be terms in the loan that tie the ‘ ‘ broker to the insurer?” Paddick asks.

Many of Paddick’s members are ready to sell up (see next page) and he says they are getting the best possible prices for their firms due to the massive demand fuelled by the consolidators .

Some are also buying. “If they have a good relationship with their bank or if they own their own premises, they will have no trouble borrowing to fund acquisitions,” Paddick says. “We’re talking about the dinkies – the little brokers that can be absorbed easily into a local firm with no complications.” Even Paddick’s own Broker Direct is buying up firms.

Biba chief executive Eric Galbraith says the market is awash with money. “There are many new sources of funding – from new banks to venture capitalists, to insurers and other brokers. Brokers are saying they have plenty of people interested in buying them,” he says.

“Lending against the value of broking is a core business.

Aden Nguyen

One of those new sources is Macquarie Bank – an Australian firm that couldn’t give a XXXX about traditional lending based on valuations and property. It provides what it calls “goodwill lending services”, where it simply examines the cashflow of the broker and will lend however much it believes the broker can afford to pay back.

Macquarie associate director Aden Nguyen says: “Our funding can be used for activities such as mergers and acquisitions, management buy-outs, succession planning and refinancing activities. Our target is small to mid-sized independent brokers with debt of more than £1m.”

Macquarie, which came into the London acquisitions market in May, has 20 years’ experience of this kind of funding for Australian brokers and says the similarities with the UK market are staggering.

“Brokers in both jurisdictions face the same three main issues of consolidation, increased regulation and soft markets,” says Nguyen. “Having banked insurance brokers through all kinds of economic and insurance cycles over the past 20 years, we offer brokers a consistent and industry-specialised approach. Lending against the value of insurance broking businesses is a core business of ours and we welcome brokers that seek maximum recognition of the value of their businesses so they can plan their future with certainty.”

Nguyen says his bank provides each broker with a personal relationship manager who gets to know how the firm works, its income streams and its future plans.

The bank has to have access to the broker’s accounts too. From this it can calculate the monthly repayments the firm will be comfortable with, and from that the size of the overall loan it can make. “Brokers need to know that their financier understands what is involved and will support them though the process,” he says.

The message for brokers wishing to remain independent is clear: forget the sharks, come in, the water’s lovely.