Top 50 Brokers: Number crunching

For the second year running we have seen consolidation in the market alongside high-ranking new entrants. Acquisitions have led the way on consolidation, the most high profile of which has been Marsh acquiring HSBC. The entry point for the Top 50 has also risen this year, finally breaching the £15m mark.

Aggregate income

Consolidation has meant the aggregate income of the Top 50 has continued to climb (see table 1, by downloading the pdf on the right in 'related files'). For five years, between 2003 and 2007, the aggregate income was stuck around the £4.5bn mark. This year it has increased 12% to £6.1bn. Growth has principally come from the London and international brokers through a mixture of acquisition and organic development. Whether this will continue is not certain but if insurance rates start to improve we are sure it will.

We’re always interested in what sits within the data and have in the past looked at the individual steps in the consolidation. This year we have focused on a different hidden fact: that of the unconsolidated insurer-owned businesses, primarily of Fortis and Groupama.

Fortis now controls or owns £189m of brokerage income through RIAS, Fortis Insurance Solutions and the newly acquired Kwik-Fit. Groupama controls a sizeable brokerage empire through Carole Nash, the Lark Group, Bollington and the CQ Group, giving it about £68m of brokerage income.

With AXA, MMA and Zurich also owning, respectively, Bluefin, Swinton and Endsleigh, there are now five major insurer-owned broking groups in the upper half of the top 50 – or six if you classify Saga as an insurer.

Putting these hidden groups together would further consolidate the Top 50: Fortis would be number nine ahead of Bluefin, while Groupama would be 20th, allowing another four firms to gain or regain Top 50 status.

Newcomers

Making forecasts can be hazardous, but our prediction last year that outsiders would make an appearance was correct.

We would like to welcome A-Plan into the Top 50. With a change of ownership, it is now filing full accounts and, in 28th position, is the highest new joiner. Other newcomers are Price Forbes at 33rd, following its buyout from Marsh, Henderson Insurance Brokers at 44th and Berry Palmer & Lyle (BPL) at 49th.

The significant slowdown in UK regional merger and acquisition activity in 2009 and the first half of 2010, together with the raising of hurdles for available finance, has meant that other potential newcomers have found it hard to maintain their momentum.

The heady values of 2007 are well and truly in the past, and it takes time for businesses owners to recognise that the value map has changed. We expect the latter part of 2010 and 2011 to bring a revival in transactions, albeit at more manageable values and modest volumes.

Good values can still be realised for businesses with strategic value, as IMAS has proved with the sale of Fish Administration and Crowe Livestock.

Three companies – Oamps, Broker Direct and Kerry London – have been squeezed out of the Top 50 by the newcomers, despite consolidation. First City Partnership has also disappeared following its acquisition by Arthur J Gallagher in March.

Growth

Looking at aggregate growth by sector (see table 2) highlights that 2009 and 2010 have been the years of the London international broker – with growth up from 13.8% last year to 20.7% this year, driven by both acquisition and organic development.

More stable exchange rates have assisted these brokers in managing their business. But it has been the economic turmoil that has created plenty of opportunities for London international brokers to push their expertise and services. Most have taken full advantage of this.

UK commercial brokers as a group have suffered in the economic downturn which, along with weak insurance rates, pushed their growth rate down to 0.8% from 9.1% last year.

The fact that only one of the fastest growing companies this year is a personal lines broker, compared with three last year, demonstrates that sector’s growth has also slowed markedly, down to 7.4% from 16.9% last year.

Individual growth chart

In a tough economic climate and with weak UK insurance rates, achieving good growth has been a commendable achievement. The fastest-growing companies this year (see table 3) are a mixture of those driven by acquisition and those that have achieved organic growth.

Marsh leads the field with its acquisition of HSBC, followed by Cobra, which has grown its network and underwriting business following its Aim flotation. Third is specialist international Lloyd’s broker BPL, which has achieved almost 48% growth by providing risk transfer solutions for clients with credit risks and foreign direct investments in emerging markets. Clearly, economic upheaval is good for some businesses.

Adrian Flux, Group Direct and Hyperion have all achieved 30%-plus increases, with RK Harrison close behind. All of them have been in or around the best growth rate table for the past few years.

EBITDA margin

We have focused on EBITDA (see table 4) as it provides a closer measurement of the trading performance of a business without any distortion due to acquisition strategy or funding.

A good number of companies have margins in the high 20s and low to mid 30s but top of the pile is Abbey Protection with Towergate in second place, slightly down on last year but still at 39%.

Newcomer A-Plan is third, confirming expectations that the business was a high-quality, high-margin company. It is an even more remarkable achievement considering A-Plan is a high-street personal lines business. The personal lines brokers that follow it in the margin table, RIAS and Fortis, are both centralised businesses.

Eight out of the top 15 brokers by margin are personal lines brokers, so despite the tough competition of a market characterised by price comparison websites, there is good money being made in the sector.

Employees

Employees form the engine room of the industry. Measuring their cost and income generation is like giving your car an MOT that takes into account both its road worthiness and its emission levels.

As in the past, the highest income per employee (see table 5) – an operation’s “road worthiness” – is achieved by London international brokers. But this is a slightly skewed view as many of the Top 50 brokers do not have or have not provided enough detail to allow us to analyse the whole table.

One company is clearly out in front this year – BPL, with almost £350,000 per employee. The next closest is Gallagher with £195,000 per employee. Gallagher has achieved the best improvement in income per employee, up 50% on last year, beating BPL’s 38.2% rise.

The ‘emission level’ test is whether the business is profitable at employee level. When using EBITDA to evaluate this test, we see that the top 10 list is much more varied by business type than the income list. London international brokers only occupy three of the top 10 places, yet one of them is way out in front again – BPL.

But it is the personal lines sector that occupies the highest number of positions, with five out of the top 10 places headed by Abbey Protection and followed by Budget Group, RIAS, Fortis and Carole Nash.

A-Plan does not feature in either table – but that’s not surprising given its good ranking by margin. Its average cost per employee is among the lowest – hence the good margin but relatively high numbers of staff.

Honourable mention should also go to Towergate and CCV, both of which feature in the top 10 by EBITDA per employee (see table 6) – achieving £36,600 and £36,000 per employee respectively. Clearly, these business models are still generating the cash – though with its debt mountain, Towergate needs to: it has £144,900 of non-current borrowings per employee.

There’s a wide range of cost per employee across the top 50 – across those that provided sufficient data – from £22,000 per employee at the low end of the personal lines brokers up to £188,000 at the high-end London brokers.

Outlook

We still believe there will be a continuing evolution of the UK broker space, which will incorporate further consolidation and merger and acquisition. Last year, we thought a regional consolidator would be acquired. In the event, it was Jelf that came closest, with a significant new investor coming on board in the first quarter of 2010.

So what’s in store for 2011? There is still a third of 2010 and the first quarter of 2011 to go, and plenty of opportunity for a big acquisition. Will another insurer make a move into distribution following Fortis, Groupama and Axa?

The next question is: where will the new entrants come from? The use of technology and its impact on the broking space has been widely discussed, but the analysis above shows that where it has gained the most perceived penetration – in personal lines – brokers are still growing and generating good profits. So can the same happen with UK regional commercial brokers? Will technology gain a foothold and really take off and still provide the brokers who get it right with continued growth prospects?

With debt finance in relatively short supply, making a material move through acquisition from outside the Top 50 into the table is less likely to happen. However, someone could secure a special line of credit that allowed them to make a significant number of acquisitions while competing with other active acquirers, such as CCV.

Overall, the future is surprisingly uncertain. Various factors are pulling in several different directions and this affects each sector differently.

UK commercial brokers are highly aligned to the economy and will therefore be eagerly anticipating the economic recovery. London international brokers will be hoping that world trade picks up, the dollar exchange rate remains stable and insurance rates improve. And personal lines brokers will be looking at rising rates on the back of claims and rising reported fraud cases.

The impact of all these elements is uncertain and much depends on how a business plans for them and then responds when the actual performance doesn’t match up to budget. IT