The Top 50 brokers this year shows a division between the ten leaders of the pack which are stagnating in growth and the pursuing 40 hungry for expansion Oliver Laughton-Scott analyses the underlying trends.

After the significant income growth of 2002/03 the Top 50 Brokers' income development has slowed down overall - there are still exceptions due to acquisition and organic developments, however the top 10 has seen a dramatic slow down.

The level of mergers and acquisitions (M&A) in the Top 50 has been relatively muted again with only Folgate, Country Mutual and Oval making any real impact. There has been one newcomer due to a management buyout, The Outright Company appearing at No 49, having been bought out of HSBC.

The more recent acquisition of Coyle Hamilton by Willis may be the start of more activity by the top 10. There was much speculation over the future of Heath Lambert but with a capital restructure being the result, rather than a takeover. The restructure has given Heath Lambert the opportunity to spread the management equity more widely and could provide a real stimulus for growth.

The Top 50 cumulative revenue (top right) is showing signs of flattening, especially compared to 2001 - confirming the view that the top 10 are losing ground against the next 40.

The relative growth rates of the two groups (right) show that growth continues to be faster in the following pack than the top 10. The speed of growth by the next 40 will be a factor that will ultimately lead to changes at the top - if not in names then in their response to the following pack.

The difference between the top 10 and the rest is dramatic and closer inspection (Table 3) shows that within the top 10 there has been a variety of developments.

Eight out of the top 10 are described as London and international brokers and their income, with the exception of JLT and Alexander Forbes, has gone nowhere this year. Is this the impact of a weak dollar?

The figures for Aon could turn out to be different as, in common with Marsh and Willis, only their US accounts have been provided, making absolute numbers for the UK difficult to ascertain.

The contrast between Swinton and AA Insurance is also significant - with the closure of Hill House Hammond there is room for more development by Swinton. The AA was selling off books of business earlier in the year - a precursor to the whole business being put up for sale. With a non-core business not really performing, it is of no real surprise that Centrica disposed of it.

How has share of cumulative revenue changed (second table down)? Contrasting this to the 2002 chart highlights the failure of the top 10 to keep pace with the developments of the rest.

The chart measures the difference in the cumulative 2003 revenue of the Top 50 with the 2002 cumulative revenue, giving a view of where revenue is being concentrated. For the second year in a row it is the "mid-market" brokers that are building revenue share at the expense of the others, particularly the top 10. To use the general comment that the market is consolidating is however too simple for the more complex developments taking place.

Best performers

The fastest growing companies 2002 to 2003 (third table down) are a mix of those developing through acquisition, Oval, Folgate and Country Mutual, and those that are achieving organic growth, such as Howden and RK Harrison, albeit with some people or team acquisitions. Oval, Folgate and Country Mutual have all made well-publicised and significant acquisitions.

Due to the relative size of Bland Bankart to RP Hodson we have compared Oval, the combined business, to Bland Bankart's prior year information, resulting in a significant move from 42 to 29.

Beckett's was also a large acquisition for Country Mutual and boosts it up the table (10 places to 31, from Beckett's 41). Folgate has now overtaken its stable-mate Towergate, replacing it at 16.

The organic growth of Howden and RK Harrison is impressive, especially as Howdens has shot into the Top 50 having been a "bubbling under" last year. RK Harrison was in the top 10 growth companies last year.

Its growth reflects the growing importance of the London/North American business, in particular the casualty division.

The development of this business as well as UIB's and RFIB's organic growth would suggest that London market businesses had good scope for development, but probably at the expense of the larger players.

One should not forget the impact of the weakness of the US dollar on the London and international brokers. While many had some hedging in place for 2003, the amount of cover for 2004 is likely to be much lower and the impact on their earnings even greater.

Commercial lines is by far the fastest growing sector (see bottom table).

UK commercial brokers are forging ahead, very much fuelled by acquisition (Oval, Folgate & Country Mutual). Those that are predominantly London and internationally focused have been hit by the slow down in rates rises, the weak dollar and lack of significant losses in the market.

Personal lines brokers have fared reasonably well with the mid-sized participants doing well, RIAS and Kwik-Fit featuring in the top 10 fastest growers and Swinton being not far behind them. With the demise of Hill House Hammond, the current calendar year will allow more development by the remaining participants in this sector.

Profits

Of course income growth is not the whole picture. It is profit growth that really drives successful businesses, allowing them to fund development and reward investors.

It is unusual to find high growth companies with equally good profit margins (see top right). So to see Folgate doing so well (albeit based on operating profit before goodwill amortisation) gives good credence to its business model and its muscle with insurers to get the best terms. But how sustainable is this?

The predominance of London market and international brokers in the top 10 highest profit margins emphasises the profit potential of this type of business, as well as control of costs. As markets weaken, maintaining this level of margin may prove harder.

JLT's position at No 4 is consistent with its reputation and could have been bettered by Willis if it had provided complete figures for the UK business in 2003. Willis's 2002 profit margin of 30.4% was comfortably ahead of JLT's 25.8%

The improvement in income per employee is key to the successful generation of better profit margins and the top 10 improvers this year (see bottom left), as would be expected, have changed from last year. There are five who were there last time, but in very different positions.

Overall the improvements this year are lower than last year, as one would expect with a lower growth year. Kwik-Fit as the top performer has achieved a significant turnaround in profitability as well.

Swinton would appear to be benefiting from integrating last year's acquisition, while the others are a reflection of good organic growth and keeping headcount under control.

Bubbling under

What has happened to last year's "bubbling under"? Howden Insurance Brokers, last year's tip for organic growth, has made good progress and come in at No 48 (see page 50) from being No 57 while Glencairn, at No 51 last year, has made it into the Top 50 at No 47.

Norman Butcher & Jones has slipped backwards a bit, while RP Hodson, having made a significant acquisition, is now well up the table at 29.

The other acquirors have found it harder to gain the necessary growth and Giles Insurance Brokers and Stuart Alexander remain in the pack just outside the Top 50.

This year we see that the Lark Group has made very good progress and if this continues it could well be in the Top 50, especially if there is some consolidation higher up the table.

Giles could also get close if the acquisitions continue and Butcher Robinson & Staples have made good progress through organic growth.

Regulation impact

We can see no evidence of the widely talked about "fear of the FSA and registration driving brokers to sell" taking place and certainly the driving force behind the growth in the growing Top 50 companies is not from this.

As merger and acquisition specialists working in the sector we have not come across any business selling because of the FSA. Some have had their bad moments when filling in the registration forms but these have passed with the aid of a stiff drink.

Age and management factors rank much higher in the reasons for selling, regulation may be a poor third or fourth.

What regulation has done is to encourage people to become buyers in anticipation of being able to acquire smaller businesses on the cheap, but very few have come forward, most have hung on expecting to buy someone smaller than themselves.

HOW IMAS COMPILED THE DATA

IMAS Corporate Advisors Ltd has compiled the data for Insurance Times' authoritative survey of the top UK brokers this year. We applied our specialist knowledge of the shape and texture of the insurance market to the task and have been pleased with the cooperation we have had from the industry.

Thanks, in particular, to those companies that released their figures in advance of their usual Companies House filing dates. As a result, the 2003 survey is built on over 90% of latest year-end accounts (for 2002 the figure was nearer 60%). Where we have not received current figures, those companies have been ranked on the table according to their latest available accounts, but excluded from our further analysis.

Having identified a pool of 75 top brokers, we analysed them closely to ensure that the survey is truly focused on the Top 50 broking businesses controlled and managed in the UK.

Visit www.imas.ukcom for further information about IMAS.

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