Top 100 2018 – From crash to cash: a decade of change

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What has driven the ups and downs in the commercial market over the last 10 years? Insurance Age takes a look at the big changes in the Top 100 Independent Brokers listing

Forty-one out of 96 brokers name-checked in Insurance Age’s 2008 Top 100 supplement have disappeared from the headline table in the most recent edition.

A handful may have declined to supply statistics and many will be still affecting the figures having been bought by a competitor.

The firms though still read like a who’s who of consolidation.

Oval, Barbon, Giles, RK Harrison, Perkins Slade, Central, Doodson, Cooke & Mason, Higos, Marshall Wooldridge, S-Tech, E Coleman, Green Insurance Brokers to name just a few.

Insurers

In 2008 insurers owned businesses controlling 10% of the UK intermediated commercial market.

Sales and management buyouts for the likes of Bluefin, Bollington, Barnett & Barnett (now ICB) and others have reduced insurers’ influence. Indeed they now own only two firms in the Top 100. It is a situation that will not be reversed anytime soon.

GWP rise
Analysis of the changes between the 2008 and 2018 supplements shows a 23% rise in gross written premium (GWP) over the decade from £5.7bn to £7bn.

The growth in market share however masks many trends and the comparison reveals there is no room for resting on any laurels.

The number of people employed in the sector has remained remarkably stable at 18,500 – back in 2008 the grouping had 18,000 staff.

Measured on a per head basis average premium is up 18.4% from £320,000 to £379,000 this year.

But while GWP has improved the same is not strictly true for income. Average income per employee has only headed northwards by 3.5% to £67,300 (2008: £65,000).

And the average margin in the supplement has in fact ticked down. Whereas 2008 posted a 19% rate, this year’s number comes out at 18.2%.

The journey towards the latest figure involved a notable blip in 2011 but overall, and particularly since then, the negative direction has been clear as the graph below shows.

2008-2018

  • Forty-one out of 96 brokers no longer feature in the table.
  • GWP has grown by 23% from £5.7bn to £7bn.
  • Staff numbers have remained stable at 18,500 (2008: 18,000).
  • Average premium per employee is up 18.4% from £320,000 to £379,000.
  • But average income per employee has only headed northwards by 3.5% to £67,300 (2008: £65,000).
  • The market’s margin has slipped from 19% to 18.2%.
  • In 2008 the listing’s top 10 controlled 53% of the GWP and the top quarter controlled 70%, this has grown to 55% and 74%.
  • The entry point has dropped from £14m GWP to £13m.
  • Insurer influence has almost disappeared (see box left).

In his commentary piece for 2011, Tony Cornell suggested reasons for the figure being an outlier but also noted that the result could be accounted for by better leverage of non-commission income, such as referral fees, administration charges and finance margins.

Cornell was so curious about the number that he worked out the rate for the majority of the market, effectively removing the consolidators, and came up with 18%.

His number crunching came with prescient words: “The latter [18%] is probably sustainable in a hardening market but the former [26%] is likely to be under pressure if insurers have to improve returns.”

Declines
Irrespective of whether 2011 was an anomaly, the declines continued thereafter, so what is behind the inexorable march in the wrong direction? It is too simple to say consolidation, but it is nonetheless interesting the pause in buying appears to reflect when margins rose.

Perhaps when businesses were not digesting the deals nor scouting out new opportunities the focus led to greater profitability?

In 2008 the financial crash and great recession were coming fully into view. Lehman Brothers collapsed, Northern Rock was nationalised and the government took a majority stake in RBS.

Broker takeovers froze up for years to come, especially in the run up to that 2011 margin peak. The freeze began to thaw in 2011 when Gallagher entered the fray with the purchase of Heath Lambert.

The return to buying really kicked off again in 2013 when Gallagher snapped up Giles. It was also the year that GRP was formed. The following year Gallagher bought Oval and PIB was founded.

2018 v 2017

The rudimentary analysis of the Top 100 for 2018 reveals a 15% leap in gross written premium since 2017 to £7bn.

This good news come on the back of last year’s 9% headline uplift in GWP.

And similarly the number of employees has risen again. Last year the increase from 16,750 to 17,500 killed the idea that consolidation leads to job losses. This year’s further surge to 18,500 really does put the final nail in the coffin.

The rising headcount came against a backdrop of the already eye-watering pace of consolidation ramping up even further.

Whereas in in the 2016-17 two year period there were 81 acquisitions, across 2017-18 there were 116.

Furthermore, previously 26% of respondents had undertaken an acquisition. This has now risen to 32%.

It is worth noting that the higher consolidation metrics came despite a slight drop off in the number of respondents. Some 81 completed the form for 2018 versus 88 in 2017.

Sticking with the whole data set reveals two further points. As the main article makes clear, efficiency remains the real challenge for commercial lines.

The average premium per employee increased 8.8% year-on-year to £379,000. However, the average income by head of staff dipped by 4.4% to £67,300 as the margin also declined from 20.2% to 18.2%.

The most accurate set of findings though is on a like-for-like basis where consecutive years can be measured against each other.

Where numbers can be crunched, 43 firms grew, 22 were flat and only eight shrank (see Broker growth segments below).

Again, reflecting the hollowing out mentioned in the previous article, the real driver of growth has been the consolidators who dominate the top quartile – as the graph, below left, also makes clear.

Last year, using a rule of only assessing firms with two years of returns that had made no acquisitions, the research found evidence of 5% organic growth. 

It is arguably the most accurate and best measure in the supplement and this year’s findings are even better. Organic GWP growth can be proved to have hit 7% with a 4.2% rise in GWP per employee.

But as per the main article, the issue of efficiency reared its head once more. Income was up 2.2% organically but when measured by number of staff it slipped by 0.5%.

Down the middle
The 2008 supplement started with the revelation that 18 of the previous year’s Top 100 had been sold. Thus, measuring the movement and change from 2008 to 2018 is being done from a base that was already in a state of flux.

And it leads to one observation – the hollowing out of the middle, as already seen in the 2008 edition, has continued.

Back in 2008 the top 10 brokers controlled 53% of the GWP in the whole listing and the top quarter controlled 70%.

This has now grown to 55% and 74% respectively. All despite the fact that Gallagher has never been in the listing.

The bottom section had an entry point of £14m GWP in 2008 and contained 28 names. Now the starting figure is £13m and there are 24 names.

Commercial lines brokers have never achieved the same margin as their personal lines counterparts, who achieved a market rate of 26.2% for 2018.

There will always be intrinsic differences between the two sectors, but personal lines players have always been a step ahead in their use of technology. The digital inroads into commercial have been well documented as has the route ahead. The figures indicate that commercial is similarly moving towards greater volume players dominating the standard market supplemented by niche specialist players – though naturally the consolidators will seek to do both.

The positive for the commercial market is that it has shown an ability to improve its margin. The market-share grab makes sense in this context of readying for tomorrow.

However, there is one last point. Not a final figure, as it is one that the research is not in a position to calculate.

Just what is the debt of the Top 100 compared with a decade ago?

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