Oliver Laughton-Scott says only time will tell if AXA’s move into distribution is misguided

It finally happened. An insurer has made a bold move buying into broker distribution with a series of significant acquisitions. Talks about the consolidators getting together have been ongoing for a number of years. The logic was simple, merge operations and reduce the competition for buying businesses. Every chief executive agreed it was a good idea and every chief executive wanted to be the chief executive of the combined operation. Deadlock.

We are fond of saying “there is nothing like cash” when advising our clients. And so it turned out when AXA appeared. Why AXA and will it work?

AXA has had a long-term involvement with Layton Blackham and a strong commercial relationship with Stuart Alexander. However, a decisive factor is culture. In France the separation of distribution from manufacturing is not the established business model. Consequently there is a presumption that the two can cohabit together.

Will it work? In the short-term, yes. The key individuals are incentivised for a number of years which will maintain the momentum. However, the hard work of actually combining the businesses into a coherent whole will only be tackled after the entrepreneurs are gone and this is when things will get difficult.

“It will be some five years before we know if AXA pulled off a strategic coup or has seriously overpaid

Oliver Laughton-Scott

The real winners of this shareholder value award should be 3i. There is a long history of manufacturers over-paying to get into distribution and by all accounts 3i did an excellent job in extracting value. It will be some five years before we know if AXA pulled off a strategic coup or, as we suspect, has seriously overpaid in pursuit of a misguided strategy. Only time will tell.

The above is not to imply that insurers have no role in distribution. On the contrary, we see them as being increasingly important in the S part of the SME market.

Clients that by their size don’t justify a personal relationship with the broker will increasingly move to internet/technology based methods of distribution. Commission disclosure, should it happen, is likely to assist insurers in building market share at the small end.

However, we believe that the M part of the SME market will continue to be dominated by brokers who know and understand their clients’ businesses.

Key Indicators

We have looked at the following as our key indicators:

Growth
Clearly a key factor. However, we are interested in increases in shareholder value; so if a deal costs more to finance (by debt and equity) than it adds in value, then the increased turnover will have actually destroyed value. So we are focused on organic growth and value added transactions, not simply growth in the top line.

Margins
We look at both the actual level achieved but equally importantly at what the improvement during the year has been.

Peer performance
If a sector is putting in excellent results across the board, then this suggests the underlying driver is cyclical in nature; that is the rating environment. The stock market is skilled at recognising the impact of cycles and tends to discount them accordingly.

Past successes
We are unlikely to pick the same company as the winner two years in a row. What we are looking for is the company that has added significantly to shareholder value in the current year.