Allianz Cornhill's purchase of Home & Legacy has raised the question of whether brokers will be acquisition targets of insurers. Michael Faulkner reports

Allianz Cornhill's recent acquisition of high-net-worth broker Home & Legacy has become a major talking point for the insurance market.

There was, of course, the large purchase price, which well-placed sources now put at over £50m and which is rumoured to be £58.5m. Then there were the ambitious growth targets: Allianz Cornhill wants to more than triple the size of the business to £100m within five years.

But it has also raised a wider question. Some see this deal as further evidence of a growing appetite for insurers to buy brokers and underwriting agencies. They suggest that in the coming months similar deals - perhaps on an even larger scale - will be done.

A recent newsletter from PricewaterhouseCoopers highlighted the "considerable vertical integration" that has been going on in the insurance sector. Noting the Home & Legacy deal and QBE's acquisition last year of underwriting agency Minibus Plus, it said these acquisitions were made to "secure client ownership in a competitive market".

Stuart Reid, chief executive of City-based broker Stuart Alexander, says it is "inevitable" that further acquisitions of this kind will occur if insurers are to grow.

He argues there are no appropriate insurer acquisition targets in the UK market at present, and large capacity deals, such as Primary's one with Royal & SunAlliance and AXA, are too "transient" to provide long-term growth because of their short-term nature.

"In order for insurers to grow, supplier ownership is the way forward," says Reid.

People in the market say that this question has shot up the agenda of insurance company executives in recent months. Only this week, AXA Insurance chief executive Peter Hubbard said he would not rule out buying brokers now that the company has been given the green light to make acquisitions by the new AXA UK group chief executive Nicolas Moreau. "We will always ask whether we can get closer to the customer," says Hubbard.

And if AXA is thinking about it, it is afair bet its competitors are too. One only has to look at the high level of interest in Home & Legacy to see this. It is rumoured that Allianz Cornhill beat off around 16 other companies for Home & Legacy, bidders that included brokers, venture capitalists and insurance companies.

Broker expertise
Consultant Tony Cornell says that buying specialist intermediaries like Home & Legacy and Minibus Plus makes sense for insurers. "They are buying a particular scheme with the expertise of that broker. And they have the money to invest in the business."

This is echoed by Nick Hall, general manager of Allianz Cornhill's personal lines division, who oversaw the Home & Legacy purchase. "We don't have the expertise in this area, but we can deliver the capital and get good value."

Of course, the opportunity to harness the distributional capabilities of the acquired business are an enticing prospect for any insurance company looking to grow.

QBE and Allianz Cornhill have both highlighted the potential to expand their distribution channels as a reason for their respective acquisitions. Home & Legacy has an agency base of over 1,000 sub-brokers, while Minibus Plus is used by 4,000 brokers.

At the time of the Minibus Plus purchase QBE's chief executive Frank O'Halloran said: "The acquisition not only provides QBE access to additional specialist commercial motor business through Minibus Plus, it also provides distribution for QBE's specialty products through this agency's extensive broker network."

Meanwhile, Allianz Cornhill is looking at the potential for selling products such as pet, equine and yacht insurance through the Home & Legacy brand.

But while buying a niche intermediary appears to be an attractive prospect for an insurance company, can the same be said for a generalist broker?

On the one hand, the acquisition of a large broker with offices around the country could give an acquiring insurer a fantastic distribution network.

But there are pitfalls. Such a purchase would raise considerable regulatory issues, not least the questions of conflicts of interest and the fair treatment of customers. An acquiring insurer would need to work hard to persuade the regulator that, if the broker were claiming to be independent, customers were still being offered appropriate products selected from across the market.

Allianz Cornhill's Nick Hall says the FSA looked very closely at the control issues surrounding the change of ownership of Home & Legacy. "One of the issues we had with the acquisition was keeping the other panel insurers on board," says Hall.

"If an insurer bought a big broker it would be difficult to get FSA authorisation."

Cornell agrees that managing conflicts of interest could make the acquisition of an independent generalist broker unattractive.

But not everyone shares that view. One broker, who asked not to be named, says that despite niche acquisitions being the more "sensible" option, general commercial business is the "lifeblood" of most UK insurers and any insurer who decided to buy a broker would have to consider purchasing a genera`list business.

There is also the question of a shifting balance of power for insurers to contend with. Cornell suggests that consolidation in the broker market may encourage insurers to acquire brokers in order to maintain their power. "One of the problems for insurers is that, as a result of consolidation, too much power rests in the hands of the top 20 brokers. Insurers need to look at how they remain a force."

Financial challenges
But commercial reasons aside, acquiring brokers and underwriting agencies poses financial challenges for insurance companies given the goodwill that attaches to intermediary businesses.

Charles Dupplin, a senior executive at insurance group Hiscox, says there needs to be strong commercial reasons for buying an intermediary in order to outweigh the damage to shareholder value that acquiring high levels of goodwill can cause.

"Insurers buying brokers will buy a lot of goodwill. This will reduce the tangible net assets of the insurance company [which affects the value of the business]. The same will apply to the acquisition of underwriting agencies."

He adds: "An insurer would need to be sure there was an excellent reason to take on goodwill that could otherwise destroy shareholder value."

Dupplin suggests that a better commercial case can be made for buying underwriting agencies rather than brokers.

"Insurers are natural bidders for underwriting agencies. But brokers are a mish-mash of things. You need to know what to do with the bits you don't want," he says. IT