Robin Lucas - A measured approach

Robin Lucas greets me with the opening line of: "There are not many left of us, you know." Referring to medium-to-large independent brokers, Lucas is well aware of the changing market dynamics that have swept across the broking landscape in the last few years.

Lucas Fettes and Partners is a great example of a business that has decided to stick to core principles, has limited ambitions and refuses to take on debt to expand. Boring? Well, yes and no. If business is about long-term security for staff, shareholders and customers then perhaps this is the best approach, although this philosophy is plainly not suited to large-scale capitalism.

On Wednesday 18 September, the worlds of two contrasting capitalist entities collided as Robin Lucas had to speed off to a hastily arranged meeting with a client in Guildford to discuss AIG's precarious position, the insurer giant having just been bailed out by the US government the day before with an unprecedented $85bn loan. With Merrill Lynch being swallowed by Bank of America, Lehman Brothers closing its doors and a host of other financial institutions reflecting on their independence, Lucas's comment that "we are living in interesting times" is an understatement. Only the next day, Lloyds TSB was asked by Gordon Brown to help in the rescue of the UK's largest mortgage lender, HBOS; the move is followed quickly by the Financial Services Authority's banning of short-selling. This in turn was followed by the US Federal Reserve's announcement that it is set to pump $700bn into the economy to buy up toxic debt if approved by congress. Lucas feels that there is more to unfold at AIG: "The AIG situation worries me. You can't help but wonder if there is more to come." Everybody in the industry is watching the situation closely and no doubt with trepidation. Other insurers are probably spying an opportunity.

Arguably, Lucas and his fellow directors have modest but realistic plans for their business. Perhaps a reflection of this ethos, the boardroom at the broker's London office is surprisingly small and sparse. Lucas says that he is content with "well-trained staff" and a "fair" commission base, arguing that it is best to choose the right cover and insurer than "take too much commission to pay for borrowing".

The industry is right in the middle of a commission storm with Norwich Union and Axa's chief executives Igal Mayer and Philippe Maso respectively trying to find the right balance between keeping their growing books of business with consolidators and paying them an amount that they feel comfortable is a good return for both parties. Lucas is unsympathetic towards the larger brokers and happy to recall that "the big boys" had their over-riders cut following Eliot Spitzer's investigation. And he has this criticism for the new big boys in town: "The consolidators have to use their commissions to pay for their borrowings and I think we are competitive, trading with fair commissions." He also thinks that companies such as these are making their staff unhappy by centralising services.

Near miss

Despite his saying this, he was in talks with one such consolidator, Oval, following the retirement of Lucas's fellow founder co-director David Fettes in March earlier in the year, though after protracted negotiations broke down a sale is not on the cards any time soon. Lucas comments: "Oval started offering us far more initially than they were prepared to deliver later. Also, we found out it was planning to cut up to 40% of our staff (due to synergies). Our people mean far too much: I couldn't look my staff in the eye to tell them." Oval declined to comment, however, the consolidator's chief executive Phillip Hodson said in June that he was planning a summer break in acquisitions and there were rumours that the firm was unable to leverage enough finance to fund certain deals.

Since the breakdown of the Oval deal, LF&P has allowed 40 of its staff to buy shares from its four partners, who still own the majority. In addition, the broker is about to announce a share scheme for all staff. Lucas believes that there are few negatives to this, as if they were to sell the business then the staff would have made a significant sum on their investments already. He states confidently: "The sort of figures still being offered (to us) would allow them to double their money if they wanted."

Perkins Slade, the Birmingham-based fellow medium-to-large broker, was another deal that failed to materialise with Oval; former chief executive David Slade is also looking to pass on his shareholding in an orderly way.

Looking after clients is clearly the priority for Lucas and today's economic environment provides LF&P an opportunity to prove its worth as a broker. Lucas remarks: "Everybody is suffering and it is really beginning to hurt out there. I speak to a lot of people and in the last quarter it has a become a bit worse. However, if you keep clients close, work hard and don't pass up any opportunities then you should be alright. I haven't seen clients trying to cut back on insurance, but they are trying to get as much as they can for as little as possible." Lucas does stop short of offering help on operating a company, though: "Although there are synergies between us and them in terms of running a business, I wouldn't tell any of my clients how to run one."

LF&P's biggest opportunity is in cross selling to existing clients. The broker has been a consistent advocate of having both financial services and general insurance arms, a model now being replicated by Oval and more recently by Towergate. Only 5% of clients are common to what Lucas describes as life (financial services) and general. Lucas is determined to increase this number dramatically by "galvanising both sides of the business". The biggest challenge is that one side of the operation does not lose the business.

Two-thirds of LF&P's book is general insurance, with the rest coming from financial services. The financial services side comprises employee benefits such as pension schemes, financial planning and mortgages. LF&P also owns 51% of Prospect Wealth Management, which provides investment advice for private clients and trusts: £350m is under fund management. Howard Cox replaced David Fettes to head the financial services team after joining Baker Tilley financial services (sold to Towry Law) a year ago.

Clients

The bulk of the firm's clients are professionals, including some of the country's top accountancy firms such as Baker Tilley, which has over 2,000 staff and a turnover of £200m. LF&P has dealt with Baker Tilley for over 25 years and thrives on referrals. Lucas aims to win one in two professional introductions, on which he says: "We insure high-quality accountants that are used to paying their bills; these in turn create profitable insurance agencies. We are not the cheapest and you get what you pay for."

LF&P also insures the majority of Oxford University's colleges and billions of pounds' worth of property. It also specialises in architects, entertainment professionals and Lloyd's accredited financial instruments - affinity-based products targeting schemes for commercial small-to-medium sized businesses. Its wholesale broking arm in Manchester specialises in "anything that is difficult to place" and has been going for seven years. However, it is a challenge to grow in the current market and, for most businesses, standing still would be an achievement. Content with a 10% margin, the company has no debt and so is conservative in its outlook; this risk-averse strategy looks prudent in the current environment. Lucas comments: "I wouldn't buy a business as there is the goodwill factor (to consider). Rather, we would prefer to take on teams."

There is a new team at the broker's latest office in Haywards Heath, where a group from Aascent Insurance Brokers, including the ex-chief executive Andy Hearn, is set to start after serving covenants. When it is up and running, there will be a dozen staff. Lucas reflects: "If you can provide all the protection you need in one office, that is the best way."

LF&P uses 300 arrangements and agencies, including Lloyd's, a figure that it is looking to rationalise to approximately half. The top-five insurers are key players but make up less than half of its £45m premium book. The company prefers to deal in specific markets such as bond insurance, contractors and entertainment and Lucas believes in spending time on each risk to discover "what is right" for the client. He remarks: "Too many people try to take too much commission to sell add-ons that aren't necessary. If you put all your insurance with one insurer then you are no longer a broker, you are a postman." He continues: "We are trying to work closely with insurers and not stitch them up."

Lucas believes that insurance premiums are on the way up at the moment, even within areas as competitive as professional indemnity. "The market is beginning to harden and solicitors' PI is beginning to cost more. Zurich is putting up rates and so are a number of facilities. It is really starting to bite now." (See this month's PB Sentiment Survey, p. 41-48, for more reaction on the future of rates).

With rates hardening and Lucas and his partners determined to continue their conservative business philosophy, there could be good times ahead for LF&P despite the economic downturn. He comments: "We have more people that would like to join than we can possibly accommodate at the moment. We look after our people and that feeds through to happy clients.

"We expect to increase premium this year but we are not expecting to move forward dramatically. We will keep a tight reign on the purse strings, as we have another 18 months of economic uncertainty and hardship. Fiscal prudence is essential, however, we continue to look for opportunities and being an independent allows us to make decisions quickly."

As Lucas speeds off to reassure his worried client, the future looks bright for LF&P. If only we could say the same for some other, more high-profile financial institutions. Interesting times, indeed.

Lucas Fettes and Partners

Lucas Fettes and Partners was founded in 1980 by Robin Lucas and David Fettes, who retired in October last year. It has 220 staff spread over ten offices in: City of London, West End, Haywards Heath, Glasgow, Norwich, Manchester, Isle of Wight, Chichester, Bristol and Berkhamstead. In January 2007, LF&P bought London-based HMB after it received its Lloyd's accreditation. The broker's website states "specialises in catering for professional people and pride ourselves in our ability to maintain traditional values in today's rapidly changing business and social environment." It adds that the company offers "an holistic range of services and advice on commercial general insurance, personal insurances and a full spectrum of financial services from employee benefits, pensions, mortgages and investment to inheritance tax planning and wealth and liability protection." Through Club LFP, it offers a discount to selected clients for services such as accountants, solicitors and surveyors, a deal for which it takes no fees or commissions.