Towergate’s move on Open International is a sharp change of strategy. Michael Faulkner reports
Last week’s audacious £276m acquisition of Open International demonstrated Towergate’s continuing ability to surprise the insurance market.
One senior insurance executive said he was “gobsmacked” at the move, while another described the deal as “stunning”.
The universal response from across the market was that it was a pivotal move for the consolidating giant, with potential for far-reaching implications for the market as a whole.
Theo Duchen, co-chief executive of software house Acturis, said: “This is a major strategic move by Towergate and may well create a change in the market going forward.”
NU intermediary business director John Kitson said the move was a “stunning lateral acquisition”. He said: “The Paymentshield acquisition took them to a different part of the market. This is a further step out in the thought process.”
Towergate bought the mortgage-related general insurance broker Paymentshield last year in a £200m deal. It was a development in Towergate’s strategy, having traditionally targeted small insurance brokers for acquisition.
The significance of the Open International deal lies in the range of businesses within the group: the acquisition covers software house Open GI, the Countrywide Network, and London market technology provider MI.
The Open GI software house gives Towergate ownership and control of a technology platform which it can use to develop its e-commerce goals.
Towergate said it would use Open GI to develop its commercial lines EDI processes. However, it has stressed it would continue to use other software providers such as Sirius (now owned by SSP) within its business.
The company has been quick to reassure brokers that its ownership of Open GI would not compromise confidential business data held by the software house.
Potentially more significant is the acquisition’s potential to grow Towergate’s scale and distribution – something many observers see as the key purpose of the deal.
Open GI is used by 2,000 UK brokers, while the Countrywide broker network has over 700 members.
Towergate chief executive Andy Homer said Towergate would look to develop its products on the Open GI platform. With £6bn in premium going through Open GI, there is a lot of business that could be directed to Towergate’s own facilities.
Homer also acknowledges that the Countrywide network has enormous potential. The network’s members transact £2.9bn of UK general insurance business, of which £300m is placed through Countrywide’s panel of insurers.
Beyond that it is not fully clear how Towergate will take advantage of the opportunities presented. There are a number of options.
Some suggest that Towergate could look to charge insurers more for using the Open GI platform. Towergate could choose to direct the Countrywide business through its own facilities, such as Fusion.
Swinton chief executive Patrick Smith said: “At some point Towergate must be looking to move its earnings upward. I would see insurers paying more. As for brokers, it is much harder to say.”
NU’s Kitson played down potential concerns for insurers using Open GI, saying the deal would provide opportunities. “NU was not on Countrywide’s network. That may change now.”
Broker Network chief executive Grant Ellis said: “I suspect that [Countrywide] is the bit that is of increased importance to Towergate. It will be interesting to see if it wants to improve its offering.”
The deal also has potentially wider ramifications, not least for other software houses, which other consolidators would now look to buy.
Stuart Reid, co-chief executive of AXA’s broking operation, said: “This is further evidence of a rapidly consolidating market across all areas. It will be interesting see what other software houses do.
“It opens up a huge possibility for Acturis and SSP for brokers that want to take their business elsewhere.”
Jelf Group chief executive Alex Alway agreed: “This move puts SSP and Acturis in play.”
Acturis’s Duchen said: “This does suggest a greater convergence between large distribution businesses and technology suppliers.
“As far as Acturis is concerned, it’s business as usual. While the long term implications are still unclear, it’s probably on balance positive for us. We will continue to work with all our insurance partners and brokers, including Towergate.”
SSP executive chairman David Rasche said he was pleased that such a high value had been placed on a software company.
The deal in numbers
Â£182m â€“ The price by paid for Open International by Montegu Private Equity and the management team when it was bought from Misys in March 2006
Â£276m â€“ The price paid by Towergate for Open International in September 2007
Â£200m â€“ Towergateâ€™s remaining acquisition fund
Â£2.9bn â€“ The amount of business transacted by the Countrywide Networkâ€™s 700 members
Â£1.8bn â€“Towergateâ€™s controlled premium