News analysis: Could and should Compass and Broker Network merge?

Compass

Speculation over the future of the two networks as brokers respond to HPS’s Compass buy

HPS and co-investor MDP surprised the market last month buying Compass Network for an undisclosed sum.

To the independent observer the deal came out of the blue for two reasons. Firstly, Compass directors only undertook a management buy-out from Arthur J. Gallagher in 2016; and secondly, HPS and MDP already had a network on their books – namely Broker Network. 

Jeremy Pace, CEO of Stoke-on-Trent broker Pace Ward, was notified of the HPS agreement at the recent Compass conference for members. Pace, who was previously a Broker Network member, welcomed the move as “a good deal and very positive”.

Compass member, director of Amicus, Paul Beck, also offered a welcome.

“It was a slight surprise, especially the timing,” he commented. “We were not expecting anything to happen nearly as fast as it did.”

Brokerbility managing director, Ian Stutz, was intrigued by a deal going through so soon. “They had only just come out of Gallagher, it was a quick turnaround,” he observed. 

The Broker Network member view

2016-08-02-tony-knight-knightsure-img-2376

Tony Knight, of Southampton-based Knightsure Insurance, has been a member of Broker Network since 2004. 

The managing director explained that it was “business as usual” for Broker Network members following the HPS/Compass deal. 

“There has been no suggestion via Broker Network that it will be anything other than what it is now,” he said.

“The deal is good for both networks and they could learn from each other.”

Knight is “not concerned” about the move and described Broker Network as his “guardian angel”.

At present, he is not expecting a joining up of the two bodies, however, he pointed out: “At the end of the day Broker Network is the larger network so if there was any merging it would be Compass into Broker Network.”

For Knight Broker Network’s offering stands out because of how it assists him with regulation.

“The big thing is compliance. They look after my client money,” he said.

Knight was a member long before HPS bought Broker Network from Towergate in March 2016 and stated that most members welcomed them as new owners.

“It meant Broker Network could go out on the front foot again,” he concluded. “They took on some big-hitters. Insurers realised that, if they [the network] had been stalling it was no longer [the case] and insurer propositions were refreshed.”

Bigger and better?

Pace noted that Compass would be looking to follow Broker Network’s lead and buy brokers [see timeline]. “It gives them money for acquisitions going forward,” he stated.

The plan, Beck suggested, is to buy firms where the bosses are looking to retire. By acquiring these brokers with exiting CEOs Compass can help to retain them as members. 

Networks in numbers

How many brokers in UK? 

3,000*

(approx.)

How many Biba members?

2,000*

How many Biba members are in networks?

800*

(approx.)

*figures supplied by Biba

This element of the deal was something Beck was particularly positive about saying if delivered it should be welcomed. “More financial stability is a good thing,” he summed up.

One un-named networks expert developed the financial strength point. “It [the deal] is a really good thing because it is, once again, an investment in the network model,” he commented. “I am convinced that networks add value to brokers.”

The two organisations having the same owners has inevitably led to the question of whether they may merge or link up in some way.

When approached by Insurance Age Broker Network declined to comment and Compass did not respond to requests for comment.

However, any coming together is something that the networks have, according to the brokers Insurance Age spoke to, denied.

Pace detailed that one of the key differences between Compass and Broker Network is the fee structure.

“At Compass every broker pays the same and gets access to the same services,” he explained. “In Broker Network the fees can vary massively.”

He accepted the investors may take some learnings from the successes of each model and apply them to the other but stressed it would be “foolish to merge the two” adding: “I cannot see how they would mix and I cannot see how it would be sustainable.”

Joining forces

The un-named expert maintained though that while the current message is the two will be kept separate, joining them up would achieve the best results. 

“The million dollar question is will HPS put them together,” he noted. “There would be logic to it as there is power in size and scale so I would want them to merge.”

Continuing: “I do not see the point of not bringing the two together…It is an opportunity to pick the best bits of each network.”

Joining the two networks is something that Beck has concerns about and he confirmed he would be “keeping an eye on it” as he values the freedom of Compass.

“Independence is a key attraction,” he highlighted.

“We do not want to go down a slippery slope of merging with another network. That is the one reservation [about the deal] I suspect people will have.

“There is a suggestion there will be no merger in the foreseeable future, but ask me again in five years. The suspicion is we might find small amounts of cooperation, for example, certain deals with insurers and conference sharing.”

Stutz said he believes that the possibility of networks merging was a result of broker consolidation. “With all the consolidation there are fewer brokers, in theory, to be part of networks,” he commented. “It is probably to be expected.”

In his opinion networks grew out of the original consolidation boom 12 or 13 years ago as a place for independents who did not wish to sell but wanted the benefits of being part of a group.

He also claimed that, since then, the market has changed and insurers do more to ensure independent brokers “feel valued and have less need to join a network”. He cited Aviva’s Club 110 as a good example of this.

And concluded that he could not see how HPS would get value from keeping Compass and Broker Network separate. 

“I would have thought they would want to make something of it,” he said.

How Compass and its new backers announced the deal

Matthew Raino, managing director at MDP, said: “We are delighted to add to our already varied group of companies and we see the purchase of Compass fitting well with our broadening portfolio of UK insurance service assets.”

 

CEO of Compass, John Lincoln, commented: “This is an exciting time for us and provides Compass with a strong long-term investor which will support our growth ambitions. The partnership will transform our business by providing us with a host of resources needed to help us realise our full potential.”

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