Two years may not sound like a long time, but the winds of change are shaping 2012 as a transformational year for the industry. We invite you to see what the future has in store
The year is 2012. The London Olympics are in full swing, mayor Ken Livingstone is back on his throne at City Hall, and over at Westminster David Cameron isn’t looking quite so youthful any more.
Meanwhile, here in the insurance world, Towergate, Giles, Oval and Hyperion are finally preparing for their long-awaited flotations and, following the merger of the century, AXA/RSA is riding high at the top of the insurers’ list. Welcome to the future.
Okay, so these things are just possibilities – and some more likely than others. But given all the big plans that centre on 2012, Insurance Times has decided to take a glance into its crystal ball and imagine where we could be in two years’ time.
First up, let’s take a look at the economy. The good news is you’re unlikely to see another savage bust like 2008. The bad news? Don’t expect a return to the boom years. Instead, there’s likely to be shallow growth, with consumers more focused on shedding debt and saving money.
Furthermore, any responsible government will by then be cutting public spending and raising taxes. The Treasury forecasts a sluggish recovery until 2012, when GDP growth will just top 2%.
KPMG Insurance partner Mark Winslow agrees. “My personal view is that it’s a lazy tick, rather than a W or V, so it will be a slow, gentle glide upwards.”
Sink or float
For the consolidators, most of them backed by private equity, an exit strategy is a must. But as one industry insider admits, only Towergate currently has the clout to go it alone. “You need a market cap of £250m plus,” the leading executive says. “None of the other consolidators could realistically float alone – they need to get together in one form or another.”
And that, indeed, has been on the cards for some time. Whether Giles buys Oval or Jelf, or whether two of the three merge, a transformational deal is a necessary prelude to the consolidators hitting the stock market.
But attitudes within the companies vary. Giles boss Chris Giles is a hawk: he has made no secret of his wish to seal a market-changing deal. Others are hanging back, though, perhaps because they are reluctant to let go of their control or their brands, or perhaps because of differing expectations regarding price.
Meanwhile, the banks will be wary of funding super-deals. Clydesdale Bank corporate and structured finance director John Holm says: “Stability should have returned to the banking market as the balance sheets of the large UK banks will have recovered. However, their appetite for debt and highly leveraged deals is likely to remain relatively subdued.
“As there are still compelling reasons for further broker consolidation, we can expect to see more acquisitions, but the banks are likely to take a common-sense approach to funding. Another issue is that there are still only a limited number of banks that really understand the insurance broking sector, and this is unlikely to change.”
Whatever happens, there will be a lot of competition to contend with. Deloitte insurance partner Ian Clark says: “The investment world is pretty agnostic as to whether it is Giles, Oval or Towergate, or some widget manufacturer or anyone else. So actually, the real hurdle when these businesses float is that they are going to be in a market where a lot of other business are also seeking to float. They are going to be competing for capital with much broader structures.”
One sideshow among the consolidators will be the race to list first. Winslow says: “People like Towergate, Giles and co will be looking to get their money out by 2012 at the latest, so I can see them trying to get ahead of everybody else.”
Any company planning to list has to get its corporate house in order first. Expect shake-ups at the top, with new committees and fresh faces on board.
One company already well down that path is Hyperion, parent of broker Howden and insurers CFC and DUAL. Hyperion Group founder David Howden has already drafted in John van Kuffeler, who has 40 years’ experience in both insurance and investment banking, in the role of non-executive chairman to oversee the listing process.
Howden says: “When you go to the stock market, people want to understand that the business is well run and it has the right management and procedures in place.”
The only company that won’t need that kind of refocus for a listing is RBS Insurance, which is likely to be up for grabs by 2012, because the European competition authorities have ordered the bank to sell up. The bankers will take care of the preparations, something very much hinted by insurance chief executive Paul Geddes.
Geddes told Insurance Times last month: “The favoured option is an IPO, but it may also be achieved by a trade sale. There’s no hurry to do it.”
Despite a tough 2009 for RBSI because of bodily injury claims, it still has the biggest personal lines market share thanks to outstanding brands Direct Line and Churchill. Most market commentators believe there will be no lack of interest from investors. As for a trade sale, the nearest competitors with a stomach large enough for a £3bn-£4bn acquisition are Aviva, Allianz or AXA.
Meanwhile, over in the insurer world, it’s the smaller players that are likely to have changed hands in two years’ time. In the mid-tier bracket, Chaucer is ripe for picking. Having already been stalked by Novae last year, it’s clear the Lloyd’s underwriter is there for the taking.
But Panmure Gordon analyst Barrie Cornes sounds a note of caution. “Chaucer has had a change of management and the shareholder register has a slight question mark over it. There have also been issues in the recent past in terms of results, and it has been involved in a lot of corporate activity that came to nothing.”
Solvency II will also factor into the acquisition equation, as insurers sell off non-core assets to raise enough capital for the regulatory requirements. That will be met head-on by firms under pressure to diversify in a soft market.
Hardy chief executive Barbara Merry says: “The Bermudians are still under quite a lot of pressure from rating agencies to the extent that they don’t have a European or Lloyd’s subsidiary that’s giving them diversification. They’re perceived to be a bigger risk as monoline reinsurers, so they’re all trying to find something that gives them the bells and whistles that they want for diversification.”
Change is in the air
Finally, Insurance Times could not stare into the crystal ball for 2012 without mentioning the regulatory landscape. If the Tories come to power, as is predicted either through a majority or coalition in a hung parliament, it will be left to the Bank of England and the Consumer Protection Agency to regulate firms.
Thankfully, insurers won’t be caught in the crossfire as the new government’s clamps down on banks. Shadow financial secretary Mark Hoban has told Insurance Times that he will treat the sector differently.
Unfortunately, brokers won’t be so lucky, as there’s a strong possibility Europe could force mandatory disclosure. Biba regulation and compliance manager Steve White says: “Once we get to 2012, the debate around the revised directive will be implemented and it will become a very topical issue.”
It’s not all doom and gloom for brokers, though: 2012 will bring plenty of corporate entertainment opportunities via the Olympics. White says: “There is likely to be a feel-good factor around it. I’m sure a lot of insurers will be saying, ‘Who shall we take to the beach volleyball in Pall Mall’?”
So there you have it: the full picture for 2012. Consolidators racing to float, plenty of M&A?activity as the pressure from Solvency II cranks up, and a regulatory landscape freshened up by a new government in power. Looks like the Olympics won’t be the only show-stopper in town. IT
Expert view: Technology in 2012
There is no doubt that 2012 will see some significant advancements in broker technology. The rise of social networking sites such as Twitter, Facebook and MySpace are likely to have an impact on the way insurance is transacted. Renewal reminders by email and text could well be replaced by ‘tweets’ and ‘pokes’. We are already starting to see people use BlackBerrys and iPhones to access comparison sites, so it will be interesting to see what comes next. Claims via Facebook?
Web 2.0 is likely to become more prevalent in the broker community, with new applications facilitating interactive information sharing. How long before someone builds an online community where brokers can transfer leads, upload contacts or comment on content? Perhaps we will see Google Wave-style applications where users can do everything from a single interface.
E-commerce in the SME market will also really start to gain traction in 2012 as SMEs change their purchasing behaviour. 2010 is just the tip of the iceberg. This is likely to effect a land grab in the SME market, with newer players and established software houses fighting for space. Perhaps we will see new aggregator sites dedicated to SME?
If broker consolidation continues, the larger players are likely to increase their overall web activity, with new web services introduced around quote enrichment, credit-checking services and online claims. Underwriting will also get cleverer. Normal underwriting algorithms will be augmented by other data, such as credit scores and claims history, in order to provide further indication of risk.
The economic climate is likely to continue to put pressure on businesses to improve efficiency, and technology will play a big part in this. Brokers will look to their systems to reduce costs across all lines of business, including non-standard schemes. We may see more brokers switching systems as they review their current providers.
In terms of the software vendor market in 2012, further consolidation will depend on the state of the economy and the exit strategies of the principals involved. Financial markets and access to debt finance is likely to have a large impact. If recovery is slower than expected, we’re unlikely to see much M&A activity, but the balance sheets of some software houses may be affected. With an annual R&D budget of more than £4m, Open GI is certainly in a good position. Brokers should be rest assured that technology will continue to drive business profitability well into 2012 and beyond.
Chris Guillaume is managing director of Open GI
Expert view: The Top 50 brokers in 2012
While the consolidators shaped the noughties, there are new forces moving the market towards 2012.
Prediction 1: It will stay an exclusive club
In 2004, the 50th-ranked broker had an income of £12.3m. In 2009, this increased to £14.3m. So while the market has been consolidating, the entry qualification for the top 50 has grown at 4% per year. A £10m broker growing at 10% compound per annum will qualify for inclusion in 2016 just in time for the Olympics; not London but the one after! Grow at 5% compound per annum and the broker will not break the tape until 2047.
Prediction 2: It helps to be called David
Talented at lion taming and taking on Goliaths? Being called David clearly helps getting to the top: 10% of leaders currently bear the name. This is not to forget ‘P’ as the favourite initial shared by 14% of the leaders. This come as no surprise, given that one Peter in particular normally gets into any broker table.
Prediction 3: Number of women leaders could double or treble
Great headline and worth a punt, but the reality is less impressive as there is currently only one woman among the top 50 leaders: Janet Connor of RIAS. Looking back at 2004, this number has not changed even if the individual has. So we may have to wait a bit longer for this.
Prediction 4: Unfamiliar names for chief executives will appear
The rise of the East is matched by their interest in entering the London market. We continue to be approached by businesses based in the Far and Middle East. These will not be cashing-out deals, however. Rather they will be an opportunity for the working directors to provide an exit for retired shareholders while retaining their own stakes.
Prediction 5: The next few years will be dull
I take it back; they won’t be. Takeovers big and small will happen, bosses’ heads will roll, the stars of tomorrow are unheard of today. And we haven’t even discussed the impact of technology. Stand still and you will be left behind.
James Simpson is a principle at IMAS.