Philip Gregory - A giant awakes

Now may not be the best time to be owned by a bank though, if you are then HSBC is not a bad parent to have compared to some of its rivals. As Europe's biggest bank, HSBC has survived the credit crunch relatively unscathed so far - apart from its higher risk US arm and some significant write-downs on US sub-prime exposure following the acquisition of Household International in 2003.

Philip Gregory is happy to be part of an international banking conglomerate. The leads generated by the bank, which has its own significant direct insurance operation, help the broker generate income from insurers for private clients and small businesses. Who else is the bank going to advise you to use other than its own insurance arm? Its broking division has been trading for 200 years and can trace its roots back to Antony Gibbs in the City of London in 1808, although the Hongkong and Shanghai Banking Corporation (HSBC) did not acquire a stake of his company, Antony Gibbs & Sons, until it was floated in 1973.

I meet Philip Gregory at HSBC Insurance Brokers' head office in Bishops Court, which is hidden down Artillery Lane opposite Liverpool Street Station. The surrounding area has gone through a dramatic regeneration and now boasts some super-cool glass urban office blocks, which house giants such as ABN Amro and its parent, Royal Bank of Scotland (oh, to be a fly on the wall in those offices). HSBC's building is impressive itself, with a large central atrium complete with trees and a fish pond.

HSBC's insurance arm covers a vast array of insurance disciplines and boasts gross written premium of £1.5bn. Excluding its actuaries and consultants division, there was £135m in revenue and almost £11m in profits in 2006, though profits declined significantly last year, with revenue down by £5m.

Rewind to 2001 and the broker was posting higher numbers from 2006, something that Philip Gregory, recruited from Marsh last year, is only too happy to admit: "We were a sleeping giant and I wanted to wake us up." He has spent the first eighteen months of the business reviewing its structure, which is complex. The broker is diverse and has a vast array of specialisms including wealthy private clients, marketing services for other brokers and international corporate clients (cargo, marine, trade credit and education - including affiliations with many independent school associations - are but a few strands of its business.)

Changes

Since his arrival, Gregory has already shaken things up by moving its small to medium-sized business into one office in Bournemouth in order to free up the rest of its UK branches to become more sales-like in their approaches to targeting larger corporate business. Gregory says business up to £75,000 of GWP was "clogging up offices" and has only just turned profitable. Instead, it is now divided between five insurers, with Allianz taking all business up to £10,000 GWP. Every time a customer sets up a commercial bank account with HSBC, they are recommended to phone its sister broker for insurance advice. Despite impressive numbers of 15,000 new customers this year, many subsequently go bust; however, retention at the broker is high at 90% with a 50% conversion rate on quotes.

Gregory describes it as "piggybacking on the bank's brand awareness". The broker is also trying to improve its quote-and-buy facilities for SME business but says it is proving difficult to convert significant numbers, though Gregory thinks that his rivals are also struggling. He says: "I'm not sure anybody has cracked it (SME trading). It is all about getting eyeball contact and we now have somebody dedicated to it." Part of the process is to redesign its tired-looking website to help provide new business.

Another significant part of HSBC's makeup is that it supplies insurance and marketing services to 2,000 regional brokers including house, motor and - for the last 18 months - small commercial. Backed up by Mitsui and AIG, this produces a 5% share of the broker's book.

The main focus of the business is corporate clients, which generates brokerage income of between £20,000 and £250,000. HSBC, through its 19 regional offices, wants to pick up "corporates that are concerned they will get run-of-the-mill standard service with no added value". Despite a decent retention rate and a professed "love of service", the business has flatlined for the last six years. Gregory concedes: "The business has not sold aggressively enough. We have had a reputation as a sleeping giant and the radical restructuring we have put in place will help us achieve that. Brokers were spending too much time doing administration. Any time we are not with our clients and markets is wasted. We have carried out significant replumbing with better administrative support."

The broker's corporate book is diverse and includes a significant London market presence in which risks such as aviation, marine, professional indemnity, directors' and officers' and political risks are placed. Gregory feels that there are opportunities in energy because it is easier to increase market share in a growing segment. He also thinks that this is a good time to attract brokers looking to move post-reorganisation.

Segment

Despite a significant international footprint, Gregory insists that HSBC is not competing with the big three for large companies with 25 international offices but rather ones with three to five offices that can be serviced through its Assurex global network. He claims: "Our software for client referrals is fantastic. HSBC is in 16 countries and, with the network, we are in 35. We are generally not head-to-head with Marsh and Aon but we would target FTSE 250 countries that have 80% of their revenues in the UK and are in four other countries." So far, the overseas book makes up 12.5% of revenue. The broker has many opportunities to open up in more countries as its bank is already represented in 80; Gregory cites Turkey and Brazil as possibilities.

Across the board, the broker has increased its business 9% this year and hopes for a similar achievement in 2009. He wants the broker to make up 20% of HSBC Insurance's profits, of which the bulk is direct personal travel and car insurance, pet cover and life insurance. HSBC has recently signed a five-year deal with BGL's Junction.

Given the economic climate, Gregory is determined to see an increase in rates but, having been in charge of an underwriting team, he realises how hard it is to achieve. He thinks this time there will be little choice: "I was part of the rescue of Municipal Mutual and we asked the underwriters for the local authority book to increase rates by 10%. In the end they decreased by 2%." He believes further that the market has to do something before it is too late: "The market was softening in the summer and post-September this has stopped. Logically, the market has to harden: investment income is down and we have had the third-worst Caribbean season on record. They need to introduce sensible increases and the concern is they won't. After 2001, insurers over-capitalised their balance sheets, however if they were to now it would be difficult and expensive.

"The new start-ups in Lloyd's and Bermuda also introduced more capacity and helped rates drift down. In June, the insurers had more capital than they needed, however once these latest losses come in they will be behind the curve. Insurers find single-digit rate increases very difficult and the danger is they leave it too late."

Gregory is wary about the immediate future but is confident in his parent company's positioning: "This could be a very serious recession but HSBC is well capitalised and has a good deposit base and loan book. However, there have been significant write-downs from the US property finance arm."

HSBC is also set to join the new London broking group, the London and International Insurance Brokers' Association, which has been advocated by the London Markets Brokers' Committee - set to split off from the British Insurance Brokers' Association in January. Disagreements about commission disclosure have been cited as one of the reasons for the split, though this has been denied by the British Insurance Brokers' Association's chief executive, Eric Galbraith. Gregory thinks that "we should do disclosure" but that Marsh and Aon have gone too far by even disclosing the potential investment income of commissions.

He remarks: "The FSA needs a clear set of rules that needs to be simple to tell the customer something helpful." When I question him about the differences in opinion between larger brokers and smaller regional players, he replies: "I can understand their concerns because my staff are worried the clients will want 10% off and, for some small clients, the percentage sounds high and that is what people are worried about."

Asked if there are any disadvantages to being owned by a bank, Gregory replies: "Inevitably, senior management has a banker's perspective and we can be caught out in a human resources policies web, though there compliance benefits.

"Banks do badly in downturns (HSBC is cutting 450 jobs in Hong Kong in anticipation) and the insurance market is counter-cyclical. We want to double our profitability by 2010."

With the global downturn in full force, many in the insurance profession will be hoping that the counter-cyclical boom for insurers will be evident in what the Confederation of British Industry is forecasting as a significant recession. If so, HSBC Insurance Brokers is well placed to capitalise as this sleeping giant wakens from its slumber of the last seven years.

HSBC INSURANCE BROKERS AFTER 200 YEARS

HSBC has produced a book commemorating its 200-year history Elephant in paper bags and steam in crates ... a history of HSBC Insurance. The broking company is made up from a wide gamut of businesses, including Antony Gibbs & Sons, Lionel Sage and James Hartley Cooper.

In 1978, HSBC took a 40% stake in Gibbs Sage, acquiring the remaining share in 1981. Following the acquisition of JHC in 1984, Gibbs Hartley Cooper acquired the UK arm of Frizzell, Richards Longstaff - which specialised in aircraft and was the leading insurance broker for hot air balloons at the time - and Holmwoods Group, which had a schools division. Following a name change in 1995 to HSBC Gibbs, four years later the broker changed name again to HSBC Insurance Brokers because "the benefits of being part of the HSBC Group" were "simply too overwhelming". The respective banking and insurance worlds collided with the acquisition of the Bank of Bermuda in 2004, a client of the broker since 1920.

The broker comprises six main client groupings: commercial, corporate, specialty, complex risks, wholesale and overseas (which includes fast-growing economies such as Abu Dhabi, China, Dubai, Honk Kong, India, Qatar, Saudi Arabia, Singapore, South Korea, Taiwan and Vietnam). HSBC Insurance Brokers moved into Beijing in 2003 in conjunction with a Chinese partner and offices were subsequently opened in Shanghai and Guangzhou in June 2008. In the UK, HSBC has offices in Aberdeen, Belfast, Birmingham, Bournemouth, Cardiff, Channel Islands, Edinburgh, Glasgow, Haywards Heath, London, Leeds, Manchester, Newcastle, Newport, Sheffield, Southampton, St Albans, Woking and York.

In the book, we learn that the relative purchasing power of a single pound sterling in 1808 was £65.95, rising to £97.03 in 1888 but falling to £4.28 in 1978.