Adrian Colosso - Retail futures

Although Adrian Colosso has a low media profile, he is real character in insurance. Feed him a small bone and he will return with what many would consider an unprintable stream of consciousness. Perhaps it is the fact that he has lived through so many business trials and tribulations over the last few years, or that he simply does not care what anyone thinks any more, or maybe he never has anyway.

Despite biting appraisals of his rivals, Heath Lambert is still talked about consistently as a prime target for the consolidators, especially as it has a network of over 20 regional offices from Aberdeen to Guernsey and close to £800m of gross written premium.

However, after a much-documented, broken-down deal with Jardine Lloyd Thompson, Colosso believes that a combined HL and JLT business would not have worked because the cultures could not have merged. The deal was considered done and dusted to the extent that The Independent even wrote exactly how much Heath's directors had made from 'the transaction'. Dominic Burke, chief executive of Jardine Lloyd Thompson, told Post in May 2007: "Heath Lambert knew the deal had run aground. They know the reasons why and they decided to get out of there first."

Although the real reason for the collapse of the deal may never be known, HL decided to embark upon a review with London-based corporate advisers Hawkpoint (according to Colosso, taking a "couple of months" and "costing a lot") and now he appears determined to remove non-core parts of the business, such as the proposed disposal of its reinsurance and wholesale division to Cooper Gay (see Broking Success pp.16-17) and concentrate on retail broking and cross-selling employee benefits.

Intriguingly, serial dealmaker Keith Hamill is a non-executive director of HL and presumably would be at the forefront of any negotiations to sell the company. Colosso describes Hamill as a "forceful character" and "somebody who doesn't know much about insurance but knows business and the right people".

History

Reminiscing about his early days, he produces a "real slip with a stamp" from a draw. In fact, much of his surroundings appear old school. The boardroom is huge, with decorations from what could be considered a bygone era of business and an annexe to one side where a large lunch had just been enjoyed. Looking around the offices, some of the computers looked distinctly dated.

One of the remarkable features of the JLT proposal was that it happened at all as HL was on the verge of bankruptcy only a few years before. The idea, according to Colosso, was to put Lambert Fenchurch and Heath together to then float the pair as one. However, fate was not on the merged firm's side. Colosso recalls: "On the day the stock market crashed by 30%, the investor roadshow started. Once the IPO failed, people wanted to leave and, in order to keep them, the expense ratio went through the roof. At the end of October 2003, the board called in PricewaterhouseCoopers' business recoveries. We did a debt for equity capital restructure and set about divesting ourselves of our businesses around the world. We either closed things down, allowed management buy-outs or sold them off." At one stage, the firm had offices in 47 countries.

Colosso does not mince his words about much, not even the company's "massive bank debt" of £383m or a £211m pension deficit. He claims that, when he took over the company, it "was in a mess." He says that the previous management team, which was headed up by David Margrett (now at Willis) failed to deliver its grand plan of creating a business big enough to compete with the big two; he believes also that the company's need to refinance early on in the project was the result of some early mistakes - a version of events refuted by sources close to Margrett.

In 2003 came the culmination of a film finance "debacle" involving the placement of quasi-guarantee deals for movie studios and production houses (insuring the lending of money against the success of films): a £2bn industry problem. The claims related back to the 1990s when Heath was at the forefront of taking the schemes to Hollywood. The practice proved extremely risky and the broker made a flurry of out-of-court settlements, putting tremendous pressure on the company. Colosso clearly would like to forget that it ever happened: "It was an industry problem. Our errors and omissions costs after the merger of Lambert and Heath jumped from £9m to £25m."

Just when things seemed unable to worsen further for the company, the advent of regulation by the Financial Services Authority caused a major headache. Colosso says that there was a funding gap between collecting money from the Insurance Broking Account and the FSA's new rules on collecting the commission when paid.

The company's pension gap was also unsustainable, with the firm making only £2m profit with a £211m pension deficit and a significant debt to repay. The Pension Protection Fund, the job of which is to protect pension holders and to keep people in jobs, bought 10% of the business with the banks owning 60% and the management 30%. The turnaround has been impressive, with the firm now making over £18m in earnings before tax, depreciation and amortisation, although as a mark of how much trouble they were once in, most of this will be spent in paying back senior debt.

Colosso has a clear vision as to where he wants to take the business next: "We want to be a UK retailer and a specialty wholesaler. That means affinity business, personal lines - which includes white labeling, national (the branches), specialisms such as art, terrorism and real estate - then there are employee benefits and major accounts such as Corus and Sainsbury's: nice names."

Development

HL's business split is 20% personal lines - including an emphasis on winning aggregator business - 17% employee benefits and the rest retail. Colosso continues: "I see growth in affinity, employee benefits, high net worth and high-quality product offerings in the SME sector." There will also be further products on the retail side, alongside a yet-to-be named sales director. Colosso comments: "The market is changing all the time. Let's get into some policy comparison; when you are in those arenas you have to make sure you are addressing the customer's needs. You can make it simple for them by putting in the work - people are not looking deep enough into the buying habit and need. You have to make the cover more akin to what they do and to benchmark it."

Colosso feels that his firm's wide range of offerings differentiates HL from its rivals and he is not phased at the complexity of managing such a business. He remarks: "We can offer a comprehensive offering from risk management to captives; a full blown advisory service. How many brokers provide local service off the back of corporate know-how? You have to add value or know-how if you bring nothing but convenience, or how can you have longevity? You have to balance that with all the big carriers because they are trying to cut you out. You have to listen to (the customers) objectives and what they can do."

The broker already has a strong list of affinity clients that includes the Royal Yachting Association, the Association of Plumbing and Heating Contractors, the Freight Transport Association and charities including Scope and Diabetes UK. Also, in the never-ending world of broker poaching, HL has signed "some names" from Willis and Jardine Lloyd Thompson for its affinity business that is headed up by Mike Owen. Meanwhile, he has just lost Richard Hancock, Jeremy Prowse and Richard Wright to Kerry London. Colosso knows them all very well and is diplomatic in calling Joe Kelliher, the chief executive of Kerry London, a "nice guy", praise that is absent in describing some of his rivals.

Claims handling is another topic that Colosso has strong feelings about and he believes that his knowledge in this area has led to an impressive internal setup: "Our claims department is in our building. Every month, we monitor each insurer's performance. Most insurers are committed to paying claims, however they may not go about it in the right way. We categorise insurers each month: we look at their availability, approach and attitude to settlement and efficiency. We choose not to publish this list but use it in discussions with insurers. It is important that they know how they fare amongst their peer group. We see too much bureaucracy in large insurance companies."

Colosso is well prepared for the inevitable question about expansion and he has been taken aback by some of the valuations placed on brokers. He states forcefully: "We are going to expand, without a shadow of a doubt. We will buy strategic or specialty companies if we can be opportunistic and it is not at mental prices; I think the lunatic valuations are over now. We will start new offices and have brokers coming from all our competitors. By the end of the year we will have an office in Birmingham, expand our offices in Southampton and Chelmsford. We will also move up the M1 corridor into Hertfordshire."

Commission disclosure has become a hot topic in the industry, especially after the FSA's latest document on the issue. Colosso has a simple but controversial solution: ban commissions. He believes that this is a good idea "because otherwise, people disguise the information." Half of HL's business is fees but clearly he sees benefits in commissions under the current climate as he feels that any furthering of this might disadvantage shareholders. HL's fee structure is complex, for example, the client could be charged by the hour or for individual services. "If commission were banned" he adds, "then at least we would have to justify (brokers' pay). If you walk into a lawyer's office you get a time sheet."

Although almost every consolidator has been linked with the business, including Chris Giles most recently, somebody he describes as a "nice bloke to have a beer with". In the final analysis, money will talk (he says "it is about how many Securicor vans they park outside"), though after a period of ups and downs, Colosso is focused on growing his business and repaying existing debts. Markets move quickly, as we all know, and it would not be a surprise to read about the sale of HL in the near future.

However, it is clear that, should HL remain independent, it has a plan to try and beat the competition whether in advisory, employee benefits or out-and-out retail broking.