Heath's £250 million merger with Lambert Fenchurch has sparked concerns that the new group will drastically reduce competition in the London broker market.
The new conglomerate's size will bring it a step closer to its bigger international rivals, Aon and Marsh. But insurance analysts believe the merger is in danger of significantly reducing insurer options in Lloyd's and the London company market.
Nick Ferrier, Lloyd's specialist with analysts Raphael Zorn Hemsley, said: "With one fewer broker in the market there is less choice for Lloyd's syndicates and larger risk carriers. It increasingly seems that the market is being reduced down to the big two international brokers Marsh and Aon."
Ferrier believes competition will suffer more in the marine and specialist risks markets where the merged group is strongest, than it will in the motor market, which has a wider base of regional brokers.
No immediate job cuts are planned, but the group has critical overlaps in its US business and information technology operations.
Joanna Parsons, insurance analyst with HSBC investment bank, expected the merged insurance broker to have a value greater than the sum of its parts.
This seems to have been borne out by the generous premium being offered for Lambert Fenchurch shares which is around 67% more than its average price over the past year of 80p. More than 25% of shareholders have accepted the deal.
Interim results from the group showed increased pre-tax profits of £0.8 million to £2m, but underlying profits fell £1.1m to £3m due mainly to increased technology investment.
Lambert Fenchurch floated on the stock market at 145p in July 1991, but eight years later, on November 18 its price was exactly the same.
Parsons stressed the group's performance may have triggered its decision not to seek a listing on the London stock market.
David Margrett, chief executive of Lambert Fenchurch and the new merged group, seemed to confirm this when he said his company has agreed to de-list from the stock market to foster a longer term relationship with investors. The merged group, provisionally known as HLF Holdings, will be a private limited company, 30% owned by Heath and Lambert Fenchurch management.
Its remaining shareholders are four venture capitalist investors, including DLJ Pheonix Private Equity, Candover, Electra Partners Europe and Advent.
The complicated merger involves HLF buying-out Heath's parent company Erycinus and making an offer for Lambert Fenchurch's shares at the same time.
Ian Martin, chairman of Erycinus, is HLF's new chairman.
Ken Carter, chief executive of Jardine Lloyd Thompson, another major UK independent broker welcomed the merger. He said: "It's great to see Lambert Fenchurch aligning themselves with Heath, as they believe it will result in a company which will be in a good position to grow, and that is good news for the insurance industry."