Which of the Top 50 management teams has increased shareholder value most? Oliver Laughton-Scott opines
The Top 50 represents the benchmark by which insurance brokers and intermediaries measure themselves. We frequently see references to a company's position within the table from prospectuses to sales literature.
But in fairness the listing actually represents the biggest, and many of these firms have been putting in lacklustre performances for a number of years.
Another feature of the UK market is that only 20% (10 out of the 50) of the Top 50 are quoted on the stock market. What shareholders are really interested in is not the size of a company but how much value has it created for its investors in relative terms.
So if all the Top 50 had been quoted, which firms would have shown the greatest percentage increase in shareholder value over the last year?
Which companies have shown performances that could earn them the title of best managers of shareholder value?
In the Top 9, Marsh was the only company to achieve growth in excess of 10%. This was enough to propel it into the top slot. We will have to wait until next year to see how the Spitzer effect will impact the financial results, but predict it will remain in the top slot next year.
Leaping from 19th to 10th position has placed it only 7th in the growth league, but all those that have grown faster have done so from a far smaller base. What makes Towergate's achievement outstanding is that its operating margins are second best overall, having risen over 40% on the previous year.
While increasing turnover by 28% its placing was unmoved at 12th. The strong performance in part reflects the underlying growth that was experienced by personal lines brokers in 2004.
The acquisition of People's Choice has seen Hastings move from 21st to 16th. It achieved the second highest increase in income per employee (just behind Carole Nash), which is a key factor in margins more than doubling, putting it 9th in the Top 10 Profit Margins.
RIAS climbed five places to 17th on the back of a 36% increase in income.
It also ranked 8th in Highest Increase in Income per Employee, which resulted in profitability increasing sharply.
Climbing five places to 24th, Oval has been successful at emulating Towergate's success. However, it does not currently match the margins being achieved by Towergate.
Moving from 36th to 29th was another good result for Carole Nash but, as mentioned above, personal lines brokers enjoyed a good year in 2004.
What makes Carole Nash's results so noteworthy is that it topped the Highest Increase in Income per Employee table.
At 31st from 39th with an increase in income of 30%, Hercules' place is secured by its margins. Although it dropped by some 10%, in 2004 it was still at 40% and significantly higher than that achieved by any other operation. Erinaceous is a highly specialised property insurer and the benefits of focus are clearly demonstrated by this company.
While the London market is largely stalled, RK Harrison produced growth of 36%, having achieved 48% in the previous year. Though it has not been acquiring companies, it has been undertaking team deals. These will typically involve an equity element and as such represent a hybrid of acquisition and organic growth.
Smart and Cook
Having got off to a slower start than the likes of Towergate and Oval, Smart and Cook has topped the growth table at 60%, taking it from 50th to 34th.
Howden is another example of a comparatively small London market broker performing extremely strongly. In 2002 it was 57th in the list and in 2003 it came 48th, subsequently moving to 36th in this year's table. This has been achieved mainly by organic growth supplemented by acquisitions.
If ever there was a case for the importance of human capital, Towergate must be one of the leading examples. Peter Cullum has built a team of highly capable individuals around him and over the course of eight years it has built a Top 10 broker.
Equal second: RK Harrison
A London market success story showing that a strong story and vision can attract quality people from the larger, less dynamic brokers to great effect.
Equal second: Hercules (Erinaceous)
Growing by 30% while having margins well in excess of the rest of the industry is a tremendous success story.
Criteria - our key indicators
Clearly key. But we are interested in increases in shareholder value; so if a deal cost more to finance (by debt and equity) than it added in value, 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.
We have looked at both this year's growth and what companies have achieved in preceding years.
We have looked at both the actual level achieved and, equally importantly, the improvement during the year.
If a sector is putting in excellent results across the board, this suggests the underlying driver is cyclical in nature, for example the rating environment.
The stock market is skilled at recognising the impact of cycles and tends to discount them accordingly.
A firm that produces strong results whilst its competitors' performance is pedestrian is adding real long-term shareholder value.
We are unlikely to pick the same company two years in a row as the winner.
What we are looking for is the company that has added to shareholder value significantly in the current year.