The scramble for acquisitions in 2006 was triggered by the need to control distribution. Katy Dowell reports
In 2006 the air buzzed with talk of acquisitions. At a rate of more than one a week brokers were falling into the hands of eager buyers with their bulging acquisition war chest.
Research by business consultancy firm JCL Hansen Young reveals that in turnover terms the top 10 acquisitions in 2006 accounted for more than £300m. Take into account the estimated 80 acquisitions made in 2006 and that figure rockets.
Why the sudden merger and acquisition activity?
"The original Cullum [Peter Cullum, chairman of Towergate] mantra of 'distribution distribution, distribution' has taken hold of the market," says JCL Hansen Young consultant Douglas Young.
"Being in control of the distribution chain has driven consolidation through the market."
Cullum has built the king of the consolidators in Towergate. In 2006 the broking giant made 12 acquisitions, the equivalent of more than an estimated £240m gross written premiums (GWP). But it's not all been plain sailing.
Last year's acquisition of Country Mutual Insurance Brokers (News, 4 May 2006) catapulted the company up Insurance Times' top 10 brokers chart. But a year later Towergate is fighting to have Country Mutual's previous owner, Bob Beckett, barred from approaching its clients.
So bad is the tension between Towergate and Beckett's new Bury St Edmunds- based venture, Insurance Risk Solutions, that Towergate has declared the town a key battleground for new business.
Yet in other areas Towergate has stormed ahead. The acquisition of Paymentshield at the beginning of 2007 saw it break into the mortgage broking market and declare an interest in acquiring IFA businesses. Could this be an attempt to diversify away from an insurance sector which has been exhausted by consolidation?
According to market analysts, Datamonitor, Towergate's acquisition train will not run out of steam before Cullum reaches his goal of £3bn GWP by the end of 2007. Achieving that goal will give the company a 7% share of the broking market.
As it stands, leading commercial consolidators Oval, Smart & Cook and Towergate control 8% of the market. Datamonitor predicts that leading consolidators will have 13% of the market by 2010.
Given Towergate's rapid rise it would be surprising if others failed to imitate its business model. Having strong distribution foundations is key to seeking out profitable business.
"Consolidation wasn't a 2006 phenomena," says Dave Smith, director of Zurich's broking operations. "It has been developing over the past few years – 2003, 2004 and 2005 were positioning years and 2006 was the year for realising that."
Many brokers fear that the lion's share of the sector will end up in the hands of the insurers.
"What we have here is a situation where large chunks of capacity are moving outside the UK," says Young. "It is almost a case of the French are on the march."
Young cites AXA's storm into the broking market as an example. French-owned Groupama bought out motorbike broker, Carole Nash, while Manchester based broker, Alec Finch was taken over by French broker, Verlingue.
While much has been made of AXA's acquisition of Layton Blackham and Stuart Alexander, Zurich's acquisition of Endsleigh was among the largest acquisitions of 2006. With a turnover of £56m, the acquisition will significantly extend Zurich's reach into the personal lines market.
It will also put the insurer in a good position to compete with AA Insurance, Budget and Swinton.
"The acquisition of Endsleigh supports Zurich's multi distribution strategy and we are excited about the opportunities for profitable growth that this deal offers," Guy Munnoch, chief executive of Zurich UK, said at the time.
Zurich's Smith says the acquisition was right for the company because it gave the insurer access to a niche market. "There are differing strategies across the insurers in how best to expand," he comments. "For Zurich it is primarily about organic growth, but we will acquire where we think it will enhance our customer proposition."
He continues: "There is a polarisation of insurer acquirers emerging. Some are obviously looking for volume while others are hedging bets, and some are going for niche business."
Smith says broker consolidation will bring mixed fortunes for insurers. On the one hand they will benefit from "greater professionalism and consistency", but there is a "danger of concentrating too much in one area". Zurich, he says, has a policy of spreading distribution.
IAG on the map
With many insurers' motor books languishing in the face of a soft market, Insurance Australia Group's (IAG) march into the UK motor market may seem surprising. But its acquisition of Hastings Insurance Services (News, 28 Sept 2006) immediately placed it on the map in the direct insurance market. Just four months later, IAG shocked the broking sector by announcing the acquisition of Equity Group (News, 4 December, 2006).
Until its sale, Equity was listed as the second largest consolidator of 2006, with 11 deals in its portfolio.
JCL Hansen Young predicts that another top listed consolidator, Smart & Cook, will sell out to an insurer. Speculation has long surrounded the ownership of Smart & Cook. Its private equity backer, 3i, is expected to look to maximise its investment by selling at a time when the market is most profitable. Many say that time is now.
There is no sign that consolidation will slow in 2007 and 2008. However, it would be wrong to assume that high street brokers will be forced out of the sector. For those brokers willing to diversify, insurers will make space. Equally insurers will benefit from a diverse broker market which is ready to find innovative distribution channels. IT