Insurers buying brokers: could it happen here?
In the wild colonial days of the South British Insurance Company and its ilk, it was all so simple. Australia was a branch office of the British Empire and underwriters Down Under genuflected before their bowler-hatted betters on their fleeting visits – usually in summer when the cricket and tennis were on.
Times have changed, of course, and Royal & SunAlliance’s departure from the Australasian market in April 2003 provided a poignant postscript to the end of an era. Today the big insurers are mainly locally listed.
Of course, cross-fertilisation continues apace between Australia and the erstwhile mother country. And Lloyd’s still picks up the tab for a hefty wad of hard-to-place risks for which there isn’t the local capacity or appetite.
But there are increasing signs the two insurance cultures are diverging.
Consolidators have been marching across the UK insurance landscape, scooping up smaller brokerages which are grateful for an easy – and lucrative – solution to their succession planning headaches.
Add an influx of private equity – Charterhouse last week reportedly paid a cool £500 million ($1.08 billion) for the Giles broking group – and it’s clearly a combustible mix.
And last week’s news that the board of the UK’s 15th-largest broker, SBJ Group, has unanimously recommended an offer from Axa to its shareholders proves even medium-sized brokers are not immune to insurers’ charms in a rapidly consolidating environment.
Axa is quickly establishing its Venture Preference arm as a rival to Towergate, whose integrated model has been attracting envious glances from insurers.
Towergate has transformed the insurance landscape over the past five years by offering a one-stop-shop – a bit of broking, a spot of underwriting and pretty much everything in between.
Since establishing Towergate 10 years ago, the consolidator’s consolidator, Peter Cullum, has presided over almost 150 acquisitions and is reportedly planning to flog a quarter of the business to private equity group Candover for £3 billion ($6.48 billion) in advance of going public.
While there is a degree of grumbling in the British broking community about insurers’ motivations and the potential for conflicts of interest, a recent survey indicated 40% of brokers are willing to sell out to an insurer. Judging by the trends, that’s a conservative estimate.
So could it happen over here? Certainly, there have been the first signs of activity from acquisitive insurers.
Last year, Allianz upped its stake in Austbrokers to 5.1% and QBE acquired a 14.9% share in the cluster group. Both were said to be strategic acquisitions intended to block takeover moves by any other companies.
At the time, QBE CEO Frank O’Halloran vehemently denied takeover plans, but that hasn’t dampened speculation that insurers are interested in moving in on the broker channel, which dominates the commercial insurance market.
The Australian insurance industry will also be looking with interest at Wesfarmers’ ability to juggle the varying demands of its broking (OAMPS and Crombie Lockwood) and underwriting (Wesfarmers Federation and Lumley) businesses.
But former JP Morgan analyst Shane Fitzgerald doesn’t think the Australian market will necessarily follow the UK. He said late last year that Australian customers are more loyal than their UK counterparts and value the independence of their brokers.
“Retention rates are extremely high in the Australian marketplace,” Mr Fitzgerald said. “Given that, it’s not likely you will see a change in distribution. Retention rates in the Australian market run at around 90%.
“Brokers need to retain independence in order to give their clients the best service.”
Certainly, few respondents to the JP Morgan Deloitte 2007 survey envisaged a great deal of change in the status quo, with brokers’ share of personal lines distribution predicted to remain static at 17% over the next five years, while their share of total commercial lines business is only tipped to dip two percentage points to 69%. But the insurers have been predicting that for many years.
And perhaps the existence of underwriting agencies provides an alternative distribution model, effectively giving Australian insurers the opportunity to let off underwriting steam that’s simply not available in the big bad world of British broking.
The question is, if one major insurer decided to break the unofficial covenant and start sweeping up brokerages, would its competitors be able to resist joining in?
Times have changed, of course, and Royal & SunAlliance’s departure from the Australasian market in April 2003 provided a poignant postscript to the end of an era. Today the big insurers are mainly locally listed.
Of course, cross-fertilisation continues apace between Australia and the erstwhile mother country. And Lloyd’s still picks up the tab for a hefty wad of hard-to-place risks for which there isn’t the local capacity or appetite.
But there are increasing signs the two insurance cultures are diverging.
Consolidators have been marching across the UK insurance landscape, scooping up smaller brokerages which are grateful for an easy – and lucrative – solution to their succession planning headaches.
Add an influx of private equity – Charterhouse last week reportedly paid a cool £500 million ($1.08 billion) for the Giles broking group – and it’s clearly a combustible mix.
And last week’s news that the board of the UK’s 15th-largest broker, SBJ Group, has unanimously recommended an offer from Axa to its shareholders proves even medium-sized brokers are not immune to insurers’ charms in a rapidly consolidating environment.
Axa is quickly establishing its Venture Preference arm as a rival to Towergate, whose integrated model has been attracting envious glances from insurers.
Towergate has transformed the insurance landscape over the past five years by offering a one-stop-shop – a bit of broking, a spot of underwriting and pretty much everything in between.
Since establishing Towergate 10 years ago, the consolidator’s consolidator, Peter Cullum, has presided over almost 150 acquisitions and is reportedly planning to flog a quarter of the business to private equity group Candover for £3 billion ($6.48 billion) in advance of going public.
While there is a degree of grumbling in the British broking community about insurers’ motivations and the potential for conflicts of interest, a recent survey indicated 40% of brokers are willing to sell out to an insurer. Judging by the trends, that’s a conservative estimate.
So could it happen over here? Certainly, there have been the first signs of activity from acquisitive insurers.
Last year, Allianz upped its stake in Austbrokers to 5.1% and QBE acquired a 14.9% share in the cluster group. Both were said to be strategic acquisitions intended to block takeover moves by any other companies.
At the time, QBE CEO Frank O’Halloran vehemently denied takeover plans, but that hasn’t dampened speculation that insurers are interested in moving in on the broker channel, which dominates the commercial insurance market.
The Australian insurance industry will also be looking with interest at Wesfarmers’ ability to juggle the varying demands of its broking (OAMPS and Crombie Lockwood) and underwriting (Wesfarmers Federation and Lumley) businesses.
But former JP Morgan analyst Shane Fitzgerald doesn’t think the Australian market will necessarily follow the UK. He said late last year that Australian customers are more loyal than their UK counterparts and value the independence of their brokers.
“Retention rates are extremely high in the Australian marketplace,” Mr Fitzgerald said. “Given that, it’s not likely you will see a change in distribution. Retention rates in the Australian market run at around 90%.
“Brokers need to retain independence in order to give their clients the best service.”
Certainly, few respondents to the JP Morgan Deloitte 2007 survey envisaged a great deal of change in the status quo, with brokers’ share of personal lines distribution predicted to remain static at 17% over the next five years, while their share of total commercial lines business is only tipped to dip two percentage points to 69%. But the insurers have been predicting that for many years.
And perhaps the existence of underwriting agencies provides an alternative distribution model, effectively giving Australian insurers the opportunity to let off underwriting steam that’s simply not available in the big bad world of British broking.
The question is, if one major insurer decided to break the unofficial covenant and start sweeping up brokerages, would its competitors be able to resist joining in?