James Simpson analyses the underlying trends borne out by the Top 50 broker list
The most notable feature of this year's Top 50 is the extent of the change in rankings. At the top, Marsh has achieved the No 1 spot, based on the analysis of US filings, while the restructure at Heath Lambert dropped it down the table with a decrease of 50% in its brokerage income.
The merger of Towergate and Folgate make it a significant riser, especially with its underlying increase in revenue of 34% and it now enters the top 10 at No 10. Other significant movers up the rankings are RK Carvill up six places (albeit from its 2003 figures) to 22, Carole Nash up seven to 29, RK Harrison up 12 to 32, Smart and Cook up 16 to 34 and Howdens up 12 to 36.
Newcomers to the Top 50 this year are businesses that we have flagged as hopefuls in previous years - Giles comes in at number 47, CJ Coleman at 48, Bell & Clements at 49 and Lark Group at 50.
The Cumulative Revenue chart shows the impact of these changes, with the decrease at Heath Lambert flattening out the curve compared to the last two years.
Looking at the changes in more detail the Difference in Cumulative Revenue chart one can see that the top 10 have lost ground again on the following pack, having 70.8% of the revenue this year compared to 73.5% last year. This decrease is despite the good growth by Marsh, JLT and the AA - Heath Lambert and Aon dragging it back.
The Top 10 losing ground to the rest has been the pattern of the last three years, although this has been reduced to 2.7% of the total compared to last year's drop of 4.2%. A key component of this pattern has been the highly acquisitive nature of the following pack compared to the top 10 over this period. The recent acquisitions by Willis and the inclusion of The Towergate Partnership in the top 10 are likely to make a difference next year, especially if one or two of the other top 10 make a move as well.
The notable absentee from the Top 50 is Hill House Hammond after its closure last year. Whether the growth at the AA, Swinton and Budget is connected with this is unclear, but the major personal lines brokers have continued to develop well, with growth ranging from 28% for Budget to 9.7% for the AA. Other absentees are Opus (No 41 last year), bought by Willis, and Prentis Donegan (No 42 last year), bought by Marsh.
2004 has seen continued M&A activity with many brokers actively pursuing a growth through acquisition strategy. The wealth of buyers has maintained values and interest through into 2005 and we see no slackening of interest, albeit values have weakened to reflect the softening state of the commercial market.
Oval and Smart and Cook have consolidated their positions with sizeable acquisitions in 2004 and 2005 as has The Towergate Partnership. Others are achieving more modest acquisitions, while venture capitalists are making their presence felt in the market, taking a 51% stake in SBJ Group as well as supporting the more habitual acquirors.
We expect to see continued activity in 2005, including further entrants to the market.
Commercial on top
Looking at the Growth by Sector chart, commercial brokers have once again topped the table, followed by personal lines with a marked improvement in growth over last year. The London and international brokers have suffered again, this year showing negative growth due to Heath Lambert and the impact of the weak dollar.
The commercial brokers' growth continues to be fuelled by acquisitions (Oval, Smart and Cook, Giles and Towergate) while personal lines growth has been primarily organic (RIAS, Hastings and Budget).
The Individual Growth Performance chart is made up from a mixture of corporate acquisitions, team building and organic growth. The top two growth companies are both acquirers and both based in the North of England, Smart and Cook and Oval; the fourth fastest is also an acquirer and based in Scotland, Giles. Sandwiched in between them is Howden, where growth was achieved predominantly through organic growth, although about a third was by acquisition.
The top organic grower was RIAS with 36%. This is an excellent performance in the personal lines market, which also includes Budget with 28% growth.
It shows that the direct writers are not having it all their own way.
RK Harrison also showed good growth through a mixture of organic and staff/team acquisitions, a 36% increase raised its position in the table from 44 last year to 32 this year.
While top line income is a measure of size the best measure of value is the profitability of the business. Many M&A transactions are measured in terms of multiples of income, but it is the business with the better margin that delivers more value for the owner.
The Top 10 Companies by Profit Margin chart contains a wide range of businesses, quoted, London and international sector, personal lines and highly acquisitive companies. Hercules is the highest margin company, specialising in property and property owners insurance it has achieved consistently high operating margins; interestingly The Towergate Partnership is the next highest margin company, albeit at the operating level before interest and amortisation.
Benfield saw a marked improvement in its profit before tax as a result of exceptional items, at the operating level it achieved the high 20s again, 29.1% compared to 28.7%. This margin sets it apart from most other London and international brokers although Windsor, Besso and HSBC all achieve better than 20% margins.
At the other end of the scale for those London and international companies that submitted current data Alexander Forbes achieved only 2.8% profit before tax margin and 11.9% operating margin.
The presence of Open + Direct and Swinton in the Top 10 profit margin list goes to show that personal lines can be made to be profitable if you go about it in the correct manner. When looking at the Highest Profit per Employee it is surprising to see that, for those submitting the relevant information, the highest profits are coming from London and international brokers - nine out of the top 10. With the recovery of Benfield's profits they top the list with an impressive £54,147 per employee - the only non-London broker is Open + Direct with £20,554 profit per employee, an excellent achievement for a predominantly personal lines broker in the UK specialist market and Northern Ireland.
Looking at Increases in Profit per Employee produces some extreme results in terms of percentage and thus we have not included a chart this year.
At the top end is Kwik-Fit which has turned a small profit into a decent profit - a turnaround of 1,986%! Others include of course Benfield with 184% as well as some of the privately owned personal lines brokers where declared profit is very much at the discretion of the shareholder directors.
Increases in Income per Employee is a less volatile measure and here we see that personal lines brokers have come through strongly, reflecting their good income growth, commented on earlier, and cost control. The productivity achieved is a reflection of the improved use of technology and the heavily commoditised nature of the products sold.
Top of the list is Carole Nash, followed by Open + Direct, with Outright and Kwik-Fit also featuring strongly. All of these brokers are providing specialised products/services or are accessing their new clients through the strength of their brands. Separating these personal lines brokers are the commercial broker Giles with a 19.6% improvement and London broker Glencairn with 18.1%.
Nearly all of our previous tips have all made it into the Top 50, achieving their goals of organic or acquisitive growth to raise their revenues to the requisite level. Keelan Westall has just missed out, being pipped by Lark Group and a good performance by Bell & Clements taking them in at number 48.
This year's entry level of £12,337 is lower than last year's of £13,130 - a sign of consolidation above this point. Those companies still aspiring have therefore the potential of a lower entry point, but it will still require a decent effort to get there with the softening commercial market.
This probably means that if they are not well down the acquisition trail already then they are going to stay just outside the Top 50.
Funding for these acquisitions should be readily available for brokers that have developed a track-record/reputation with their bankers - establishing that you can repay borrowings at or in advance of the borrowing terms makes the next round of funding much more straight forward.
So who might from the following pack? It would appear that it is likely to be London Market based companies, especially as teams of people move more easily and have been doing so. Identifying the net beneficiary of these moves is however not easy to fathom - if a team moves once it can quite easily move again, it is only an issue of turning left out of the station rather than right.