In depth: M&A is main driver of change in Top 50 Brokers

The past year has seen significant change in the distribution market as a result of a year of mergers and acquisitions activity. Headlining the change was Marsh’s acquisition of JLT Group, closely followed by Gallagher buying Stackhouse Poland and Ardonagh’s acquisition of Swinton.

The acquirers have been busy and moved themselves up the rankings while personal lines brokers have found the going tough with their growth slowing compared with last year on a like-for-like basis.

Newcomers to the Top 50 this year are Animal Friends, Eldon Insurance and Seventeen Group, the first two having achieved good organic growth and Seventeen Group completing several successful acquisitions.

Material moves up the rankings have been achieved by One Call Insurance Services, up 14 places, CFC Underwriting, up 10 places, and Crispin Speers and Specialist Risk Investments (Miles Smith and The Underwriting Exchange) both up eight places.

Top 50 make-up

The volume and scale of acquisitions has changed the sector make-up of the Top 50 – with JLT no longer an independent company, international brokers now only represent 47.7% of the Top 50 revenues, down from 52.5%.

This decline has been compensated for by commercial brokers, which are up from 11.3% to 14%, overtaking London market brokers which are also up –  to 13.9% from 12%.

On a like-for-like basis, however, international brokers have grown, along with all other sectors, although personal lines brokers have seen the least growth at 5.5%, down from last year’s growth of 9.2%, while commercial brokers have seen the strongest growth, at 22.3%, fuelled by acquisitions.

For the first time in 10 years the overall revenues of the Top 50 brokers have fallen. The concentration is still at the top, but with all of the changes among the companies ranked six to 20 there has been a decline as the constituents have changed due to movements up the rankings. 

While Ed Broking and Besso are under common ownership they have not been brought together in the rankings. If they had been they would have ranked 16 and made up for some of the decline. Miller is also majority-controlled by Willis, but have been left as separate entities on the basis of separate management.

Ownership of the Top 50 has been affected by the takeover of JLT, reducing the number of UK Listed companies to three; private equity (PE) owned and overseas-owned entities have stayed constant at 19 and 12 respectively, and privately owned has picked up one to 16.

The revenue-based measure shows a more dramatic change with the listed companies losing their largest entity and so now only represent 7.9% of revenue, down from 19.4% last year. With JLT having been acquired by an overseas company, this grouping has risen to 51.5% from 46% and PE-owned companies have risen to 25.9%, from 21.8%.

Growth in turnover

Focusing on individual company performance, Eldon Insurance has shown significant growth in turnover although the numbers in its accounts are gross of payments to its related companies, which we have deducted for ranking purposes.

Next highest net retained income growth was by One Call Insurance Services, but much of this is due to a change in its accounting for cost of sales, underlying growth per its accounts was 12.6%. 

Thus, the best ‘underlying’ growth in income has been from Specialist Risk after its acquisition of The Underwriting Exchange, closely followed by fellow acquirer Seventeen Group.

The best organic growth has been achieved by CFC Underwriting, with an excellent 40.1%, a highly credible performance in a competitive market. Following closely behind them is Granite/Acorn, which achieved 37.2% organic growth in the specialist motor sector. 

The individual growth performances are by and large lower than last year’s best performers, reflecting the more difficult and competitive market and that achieved high growth in percentage terms becomes harder the larger a company becomes.

True success is generating good profit margins and it is notable that five of the top 10 best margins have been achieved by personal lines brokers, the top six if Granite is included. Three London market businesses make up the next three best margins, with 10th place being a commercial broker with a highly respectable 30.9%. 

The Top 50 listing shows that the benchmark margin for a broker has to be 20%, with 70% broadly achieving this. Companies that have risen to this target this year are Specialist Risk, Seventeen Group, BMS Broking and UIB. Aon and Crispin Speers Group improved their margins by 500 basis points.

Staff performance

Intimately linked to margin is performance by staff, whether through efficiency or by adoption of IT. Staff costs remain the single largest cost factor for the distribution sector, although online distribution costs must be starting to get close to this for personal lines brokers.

Income per employee has improved across the board for Top 50 companies that have provided employee data, rising to £137,900 per employee; the best improvement has been in the commercial sector, followed by international.

Individual company performance is still dominated by international and London brokers, who remain at the top of the table and it is only BGL that breaks this monopoly. BPL holds onto its long-term position at the top of the table, albeit with a lower income this year, with all of the other top 10 companies just about matching last year’s rankings.

Individual improvements show more sector variety, with personal lines broker MCE improving by 34% following a material decrease in the number of employees. Ardonagh and RFIB both improved by 30% and iGO4 improved by 27.6%, all following a fall in employee numbers.

Performance compared with last year’s top 10 is varied, but on the whole shows continued success in achieving efficiencies.

As important as income is profit per employee and especially improvements in this are the real measure of success. As with income, BPL heads the table with the most profit per employee. But it is RFIB that has shown the most improvement this year, turning a loss into a profit, an improvement of some £36,000 per employee. 

Next comes BMS Broking, which has increased its profit per employee by £24,930, off the back of a 23.2% increase in income and 1% improvement in margin. Specialist Risk has also improved its profit per employee by £23,320, reflecting a material improvement in margin after the PE investment in early 2018.

In a period of relatively full employment it is interesting to note that, where data has been provided, there has been a 6.2% increase in the number of employees this year compared with last year, with the largest growth in London market companies.

Whether pressure on salaries will start to feed through it is not clear, certainly it is not true this year where the average cost per employee was down 6.6% overall, led by personal lines, which was down by 7.5%, based on the submitted data, and international, which was down by 0.8%. Commercial showed a significant increase, rising by 9.3% to £48,400 per employee. Is this something to do with consolidation and owner/managers now taking salaries rather than dividends?

Concentration continues

The concentration at the top of the rankings continues, with the largest companies acquiring the next level down, which in turn are acquiring the next tier or two down from them.

The impact of the JLT acquisition by Marsh has seen a material amount of international income leave the Top 50, reducing its overall level of income, but we fully expect this to grow again next year, with the PE-backed companies continuing to grow through acquisition. 

Whether they will succumb to the majors when investors come to realise their investment is not clear.

There is sufficient evidence to show that their preferred route is to find longer-term investors and not sell to the majors, but in the end the money will determine the outcome and, with the values paid for Stackhouse Poland and JLT, who knows whether such disposals will be resisted.

The increase in headcount, but reduced average employee cost in the personal lines sector seems contrary to the extensive use of technology in the sector, or does it mean that technology is replacing expensive people?

In any event, we fully expect to see technology play more of a part in all sectors, but more of it will be applied to analytics, with employees focused on client service and business development. In this way we still see insurance distribution being a material employer in the UK.