What changes will 2008 bring to the industry?

Mergers and acquisitions

Acquisition was the hallmark of the past year with a staggering level of activity. The major consolidators continued to hoover up smaller brokers.

The year started off with a bang, with AXA’s acquisition of brokers Stuart Alexander and Layton Blackham – a pivotal move that kick-started the debate about the future of the general insurance market, and forced other insurers to consider their own strategies.

AXA, through its broking arm Venture Preference, was aiming to be a major consolidator of SME brokers. Three months later it bought Smart & Cook, in a deal thought to be in excess of £150m.

The deal made Venture Preference the UK’s second largest SME broker as it increased its foothold in commercial broking market.

In June, Giles Insurance continued its acquisition drive with the £25m purchase of Ink Underwriting, and Manchester broker CBG made its first acquisition following a £3m share placing, buying G F Baskeyfield.

CBG was then the subject of further investment when Allianz upped its stake in the broker to 5.6%.

Groupama made its intentions clear in the distribution debate, buying a majority stake in Manchester broker Bollington, as it looked for growth in the SME market.

The French-owned insurer also made the news in September, when it beat off a number of broker competitors to buy a majority stake in Lark Group.

September also saw Broker Network make its 20th acquisition with the purchase of commercial broker Sullivan Garrett.

The market was then stunned by one of the major deals of the year, when Towergate announced the largest deal in its 10-year history with the acquisition of Open International.

The £276m deal included all Open International Group companies – software house Open GI, the Countrywide Network, and London market technology provider, MI.

Towergate didn’t stop there. In November, and after weeks of speculation, its interest in the Broker Network was confirmed after it bid almost £100m for the network.

The year ended with Oval reaching a milestone after a year-long acquisition drive with its 25th acquisition, with the purchase of Bristol-based Tett Hamilton.

Prediction for 2008

2008 should see plenty more acquisitions, with the potential for some of the larger brokers consolidating. Prices may continue to rise as the number of good quality acquisitions diminishes.

The changes to the Capital Gains Tax rules in April could see a number of deals taking place in the first quarter of the year as brokers look to avoid the increased tax .

Towergate’s deal for the Broker Network is expected to be formally completed in the early part of the deal, and could herald the start of acquisitions within the network arena.

People

For those insurance junkies who can’t get enough of the comings and goings of the market, keeping track of Norwich Union (NU) in 2007 may have been a dizzying task.

With a massive restructuring, fuelled by the retirement of Richard Harvey as group chief executive after almost 10 years, NU captured headlines throughout 2007 and it seems as though not many months passed without the announcement of some major change.

With Andrew Moss at the helm as chief executive, significant changes were made, with Aviva executive director Patrick Snowball leaving suddenly amid speculation of a boardroom bust up – denied by Aviva.

There followed a restructuring of NU’s middle and senior management teams, under the eye of new GI chief Igal Mayer.

NU was far from the only company to undergo major changes in 2007 and if anything, the year marked exceptional activity in terms of senior people moving between companies.

After 20 years with Royal & SunAlliance (R&SA), Brendan McManus stepped down as managing director of the broker division to become chief executive of Willis UK & Ireland. He was replaced by Paul Donaldson, from R&SA’s Ireland business.

Continuing the theme of insurers moving to brokers, AIG Europe boss Dan Glaser took over the global helm at Marsh, to fill the hole left by Brian Storms. Earlier in the year, Martin South, the boss of Zurich’s international business, was appointed to head Marsh UK.

There was also surprise at the news that Jonathan Davey, chief executive of virtual insurer PBS Holdings, had stepped down (15 November), to be replaced by Tim Rolfe, PBSH’s chief operating officer.

It could also be said that 2007 was the year of restructuring with many companies merging divisions in an effort to cut overhead costs and streamline business.

Royal Bank of Scotland Insurance (RBSI) launched the second phase of its restructuring in December in ongoing efforts to create more cohesion between its separate and sometimes competing brands. Commercial and brokers were combined under one managing director – Andy Cornish.

The move saw the company lose two senior people, managing director of RBSI motor Chris Moat, and chief risk officer Robin Webster.

Zurich, Allianz and R&SA underwent structural changes too. Meanwhile, Zurich poached RBSI director Mike Quinton to head the retail and partnership division. Adam Clarke, RBSI’s former commercial director of home, pet and travel defected to Fortis where he was appointed director of underwriting.

Predictions for 2008

Expect to see the comings and goings in 2008 with some senior people expected to step down, particularly within the broker and loss adjusting market.

The spat of restructuring will likely continue with consultants predicting more companies will follow the trend of combining various divisions under one manager.

Claims

Without question the headline event of the year were the floods that ravaged parts of northern and western England in June and July, and left insurers with a claims bill in excess of £3bn.

The floods brought to a head uncertainty regarding the condition and administration of the nation’s flood defence network and, in turn, the feasibility of insurers guaranteeing the provision of flood cover in areas deemed high risk.

In subsequent weeks the industry came under fire from the government, which urged insurers to ensure that claims – numbering over 55,000 – were dealt with swiftly, amid allegations that their supply chains were overstretched.

Events at the legislative level were equally seismic. Claims reform in the personal injury sector began in April with the publication of the Ministry of Justice’s proposals to simplify the claims process that has been dogged by inefficiencies and excessive legal costs.

The proposals were met with derision by claimant solicitors, but were broadly welcomed by insurers. They pledged to begin the necessary investment to bring their claims handling apparatus up to speed.

In October, insurers won a landmark victory in the Lords when it ruled that pleural plaques was not a compensable disease (25 October). It is estimated that the decision could save the industry almost £1.5bn.

The issue of periodic payments also reared its head with a legal dispute that threatens to see personal injury claims costs soar.

Meanwhile, claims inflation continued to outstrip premium inflation. As a result of inflation of 9.5% over the past 10 years, motor bodily injury claims topped £2bn for the first time, the ABI revealed.

Claims

Moving into 2008, uncertainty and unease among insurers regarding the guarantee of flood cover will reach breaking point. Having almost reached the limits of their reserves, something has to give. Based on the behavior of the government in 2007, it will not be ministers.

Another natural catastrophe – not an altogether unlikely event given the still abnormal level of groundwater – could act as a catalyst for withdrawal or, at the very least, the imposition far more severe restrictions on flood cover.

The ABI’s statement of principles will likely be revised.

The Pitt review of the flooding will also raise further issues for the insurance industry.

The claims reforms process is likely to be bogged down by concerns relating to fixed fees for non-motor accidents, as well as referral fees. The introduction of legislation is expected to be delayed until 2009.

The pleural plaques can of worms, having been reopened in Scotland, will force insurers to compensate victims north of the border, with a potential impact on rates.

Predictions for 2008

Moving into 2008, uncertainty and unease among insurers regarding the guarantee of flood cover will reach breaking point. Having almost reached the limits of their reserves, something has to give. Based on the behavior of the government in 2007, it will not be ministers.

Another natural catastrophe – not an altogether unlikely event given the still abnormal level of groundwater – could act as a catalyst for withdrawal or, at the very least, the imposition far more severe restrictions on flood cover.

The ABI’s statement of principles will likely be revised.

The Pitt review of the flooding will also raise further issues for the insurance industry.

The claims reforms process is likely to be bogged down by concerns relating to fixed fees for non-motor accidents, as well as referral fees. The introduction of legislation is expected to be delayed until 2009.

The pleural plaques can of worms, having been reopened in Scotland, will force insurers to compensate victims north of the border, with a potential impact on rates.

Rates regulation and markets

Benfield once compared the reinsurance market as like a crème brulée – hard on the outside but soft inside. If the culinary theme, were continued, rates in the UK general insurance market could be described more like an Eton mess – generally soft with some hard bit‘ within.

The UK motor market continued its slow recovery in 2007, with the green shoots of rates increases that were seen at the end of 2006 continuing, albeit tentatively, although not enough to move the market into profitability.

In other sectors, the insurance industry’s tendency to indulge in cut-throat price competition continued. The liability market was described by some as being in “free fall”, while competition in smaller commercial, fleet and property business continued.

Groupama chief executive François-Xavier Boisseau said that, for the first time, its commercial book would not grow in 2007 given the toughness of market conditions.

But there was a glimmer of hope. Against the dark clouds of the summer’s catastrophic UK flooding, there were moves by some of the major insurers to increase rates – not just in the household sector, but across a broad range of commercial classes.

Norwich Union and AXA increased rates by as much as 10% in property and fleet classes. Allianz also said it was looking for rate hikes of up to 7%. Further rate hikes were pencilled in for 2008, leading some to speculate that the soft market could soon be over. (‘Commercial rates set to rise by 10%’, News 11 October)

But there was still some concern among some of the market’s senior figures. Fortis Insurance chief executive Barry Smith warned that insurers’ hunger for market share could hamper the recovery of the commercial lines market.

On the regulatory front, the FSA finally made its long-awaited announcement on mandatory commission disclosure for commercial lines business. To the frustration of many in the broker market, the FSA decided to maintain the uncertainty, delaying its decision until the completion of a further programme of work. This would include broadening its investigation to include conflicts of interest, raising the prospect that the acquisition of brokers by insurers will be put under the spotlight. (‘FSA to probe industry over conflicts of interest’, News 13 Dec)

The global credit crunch and sub-prime fears had an impact on the insurance market.

There were mixed views on how the summer’s credit crunch would affect brokers’ ability to raise capital for acquisitions. (Brokers seek insurer cash as credit crunch hits, news 20 September 2007)

Analysts warned that the sub-prime prime crisis could cost Lloyd’s insurers $500m but there was little certainty about the extent of the losses and which companies had the greatest exposure, whether through claims or their own investment portfolio.

Predictions

With the UK poised on the brink of recession it remains to be seen whether the fears about the impact of the credit crisis will be resolved. The state of the industry’s exposure to the sub-prime crisis will also become aparent in 2008.

Meanwhile premium rates will continue to move. Private motor is likely to continue to see rate increases in the order of a few percentage points, but possibly more as insurers’ confidence grows.

In the commercial lines market, insurers will look for further increases. The question will be the extent to which the words of senior management are reflected in the actions of the underwriters at the coalface.

On the regulatory front, it will become increasingly clear during the course of the year, whether the FSA is minded to mandate commission disclosure and, if so, how.

Lloyd's

It is fair to say that overall, 2007 was a success for Lloyd’s. Its half-year pre-tax profit was £1.8bn, compared to £1.35bn in 2006 – although the 2007 result was buoyed by £400m in reserve releases.

Nevertheless, the absence of any major catastrophes in the second half of the year bodes well for its full-year results. Indeed, the Kyrill windstorm and UK floods have to date been the only major meteorological upsets.

Lloyd’s continued unsuccessfully to pressure the Treasury and FSA into reducing the tax and regulatory burden on the London market, in order to better compete with the 0% corporation tax rate of Bermuda and low rates in other world markets.

Lloyd’s chairman Lord Levene presented to Treasury minister Kitty Ussher and FSA executives at an insurance summit at 11 Downing Street in November. However, the Treasury refused to budge, with the Treasury leaking a statement to the Financial Times on the day before the summit saying that there would be no tax relief at all.

The tax issue was one reason Hardy decided to redomicile to Bermuda, with Kiln already having set up on the island earlier in the year. They continued the trend that has already seen Catlin make the journey in 2002, and Hiscox and Omega in 2006.

On the M&A front, Bermuda companies continued to show interest in purchasing Lloyd’s vehicles. Talbot went to Validus Re for around £200m in May, while Ariel Re acquired Atrium for £193m in July.

Most recently, Heritage turned down a takeover bid from Ironshore. But the biggest Lloyd’s purchase occurred in December, although not by a Bermuda company: Japanese giant Tokio Marine announced it was poised to acquire Kiln for approximately £442m.

Catlin suffered from the departure of a number of ex-Wellington staff at the start of the year, following its £700m acquisition of the latter at the end of 2006. Many defected to start-up Syndicate Aspen, including underwriting director Matthew Yeldham.

However, Catlin played down the departures, saying that they were “inevitable” following the integration of the two companies.

Electronic reform also figured highly on the agenda, although the Market Reform Group’s electronic claims files (ECF) and accounting and settlement repository (A&S) targets were repeatedly missed throughout the year.

Even so, managing agents and brokers who lagged behind did not face sanctions, despite numerous threats from chief executive Richard Ward.

2007 saw the launch of the first ever bank-backed Syndicate: Pembrace, run by the Bank of America, which started trading in January.

In November, Goldman Sachs announced that its Arrow Syndicate would begin trading in 2008, leading Lloyd’s Market Association chief executive David Gittings so say: “It will be fascinating to see what happens next year.”

Predictions for 2008

With continuing pressure on rates, underwriting discipline will be key. Expect Lloyd’s to keep a close eye on syndicates’ pricing.

Across the market, electronic reform will remain high on the agenda. Once existing initiatives have been completed, the focus will shift on to implementing electronic trading platforms for less complicated risks.

Interest in Lloyd’s insurers will continue to come from abroad, especially from Bermuda, with a flurry of acquisitions likely to occur at the start of the year.

There may also be further interest from international banks should they be impressed with the Bank of America and Goldman Sachs ventures.