In defence of independence

Business decisions often involve far more than the consideration of balance sheets and sometimes they can be extremely personal. For Paul Samways, the most important decision of his career was touched by tragedy. His partner, Alan O'Brien died of a brain tumour. Samways says: "It didn't feel right to carry on in the same way without Alan." So, following a meeting with Kerry London's chairman Joe Kelliher, Samways sold APN, now in Ealing, on 1 June 2002. Samways describes the feeling of selling as "more than business."

O'Brien and Samways had started leisure and property specialist APN, originally based in Hammersmith, in 1984, following an inauguration into insurance with Allianz. Moving into rented accommodation, following the sale of their houses, they bought a derelict building and although the plans to live 'upstairs' didn't come off, they remained as partners. The business grew to 12 staff and controlled just over £10m of premium income.

Meanwhile, Kerry London had been making steady but unspectacular progress. Wholly owned by chairman Joe Kelliher, a former London market man and a "very young" 58, the acquisition of APN and the hard construction market was the catalyst for a significant spurt of growth. Kelliher has created one of the biggest independents, and according to Samways his "word is very much his bond".

Helped by a string of acquisitions, the broker has grown from around £40m to over £175m of gross written premium and there are now 230 staff and six locations.

Another helping factor in this period was the merger of O'Rourke - its largest client - with Laing, forming Laing O'Rourke, who is still its client today. A year after acquiring APN, Kerry London bought AWR in Watford, adding to the city office and the Isleworth office, to which APN was moved.

In 2003, Regent was bought in Acton and relocated to Isleworth. AWR's office space was expanded and the commercial book of Bellevue was bought at the same time that Norwich Union bought its personal lines business. In 2004, Kerry London picked up a construction team from Alexander Forbes (now Lockton) who were relocated to Watford, and also a professional indemnity team from BWP (later bought by Towergate).

In 2005, the most significant purchase was the £60m underwriting agency Euclidan, now renamed Vantage. Its biggest specialisms are caravans and tour operator liability, covering 75% of the number of operators. It runs one of the biggest caravan facilities in the UK, with 50,000 on its books, and includes the trade name 4Site. Kelliher only owns 51% of Vantage and 51% of Kerry London (City), which is to be rebranded Kerry Lonsdale. At Birchin Lane, there is also the London broking team, Vantage on the second floor, and Kerry Lonsdale, the Lloyd's arm, on the first floor.

Holbrook, a specialist in construction, was also purchased in Godalming and it has several large schemes with Axa for plumbers and electricians.

Samways is confident that Kerry London's model can survive and thrive without the need for external finance. He comments: "A major differentiator for Kerry London is that it is privately owned, which has pluses and minuses. We don't have access to the same level of capital of others but Joe has realistic expectations of the return from the business. He knows the market and we are never forced into short-term decisions. He is a long-term player."

Paying back loans

Turnover doubled in 2005 - which was in excess of £20m in commission and fee income - but the cost of acquisitions led to the profit halving. Kerry London is unphased by this approach as they are keen to pay off the acquisition costs as quickly as possible. Another Southern-based construction specialist was almost bought last year, and the deal should be going through by the end of 2007. The philosophy is to use free cash flow and not to rack up too much ongoing debt. Samways comments: "We always use profits to pay back loans."

From day one, Samways, who is based in Isleworth twice a week and travels across the group's offices, has been involved heavily in Kerry London's acquisitions strategy, to the point where Kelliher let Samways "get on with it". In 2005, Samways became operations director and the group structure is being reviewed, with Ken Wallace, a non-executive director, taking an active role. In order to harness strengths, including internal cost savings by cutting out duplications, some roles may become group ones. Samways reflects: "For example, we have four FSA registered staff, how could we save across compliance? Also, we want to maximise our group buying potential, working closely with auditors."

Kerry London Underwriting Agency, based in Isleworth, has a wide variety of schemes including scaffolders, contractors, property owners and hotels, and has partnerships with more than 300 brokers, a base it is looking to expand.

Samways says: "We have an internal schemes directory and we want to promote KLUA internally, and it is important our staff realise it is an alternative. A catalyst for the emergence of the agency was a scheme with Benfield, which wanted a partner for the front end of a roofing and scaffolding captive facility. It is being underwritten by QBE."

He continues: "KLUA has more and more capacity and the British Insurers' Brokers Association conference was great because several of the capacity providers came to discuss giving them underwriting authority. The carriers are giving KLUA more and more capacity. However, there is always the worry that, if you support your own underwriting agency, there is a conflict - but we run it separately."

One of the biggest clients at Kerry London is a commercial lettings company Workplace, which buys and refurbishes light industrial buildings and offices in conjunction with Norwich Union Risk Services. There are 4000 tenants and a churn of 25% each year, although the company often keeps the client's insurance when they move on. The success of the scheme was recognised at the British Insurance Awards in 2004 by winning the 'Risk Management Award'. Samways comments: "We insure the freehold of the building and an annual policy for contents." When asked if the annual insurance contract creates a problem for these kinds of arrangements, which are often short leases of three to six months, Samways says there is more flexibility: "If we are cross-selling - for example, if we are doing their liability and start to do their commercial vehicle - we are finding if we want a common renewal date and it is in nine months, we find we can get it for nine months. The rigidity of the annual contract does seem to be moving away."

Another specialist area in which Kerry London has an edge over many of its rivals is cricket. Surrey, Sussex and Hampshire county cricket clubs are established clients and the broker has now won the contract for the English and Wales Cricket Board, beating off several high profile rivals, including the holders Aon. As part of the deal, Kerry London will provide each county with a "free health check". It will also arrange excess layers for liability insurance for international fixtures, which is pertinent on any county ground that holds such a match. The contract includes motor fleet, contents, personal accident covers and centrally contracted players. In addition it includes all England teams such as the under-19 and ladies team, as well as the administration staff. One of the insurances would, for example, mean there can be payouts for injured players missing out on match fees.

Passionate approach

One of the hardest parts of Samways' new job was giving up servicing his clients but the remaining four - all in cricket - are close to his heart. His passion for the game seems to have won over the ECB. He says: "I am, sadly, a cricket nut. I think insurance is a very interesting subject and people underestimate the value of speaking to clients with enthusiasm and showing you really care."

He said to the financial director at the ECB: "If you think it is cheap, it is expensive because I have never come across a bargain." He continues: "(The contract win was) based on service, rather than quotes. We were given a menu of covers and we were asked how would they get to know our market better. It is early days and we are reviewing all policies."

Another way in which the broker is developing is by investing in technology. Samways comments: "Kerry London is spending substantial amounts of money on research and electronic trading. Some of the software is being used for per capita liability cover at Holbrooks, where 20% of the business is online." He continues: "A total of 25% of our caravan business is online, underwritten by Groupama. Claims and accounts are all done in real time." However, there are challenges ahead in co-ordinating the IT fully. He says: "We set up a group IT committee to review our software. We have Insurecom with Kerry London and Open GI with Holbrook. If there was a back office system that fitted all we would use it, however, because of the different natures of an underwriting agency, Lloyd's and a regional broker, I'm not sure we will end up with one platform - that is an ideal world! It helps if the software providers consolidate because they will then have to provide a broader offering."

Construction is still the biggest part of Kerry's book. Throughout the group, the premium is around £50m of gross written premium. Do long tail liability risks affect brokers? Samways replies: "In a hard market, lots of insurers did reduce commission rates, however, despite rates creeping up a bit, it is still an area that does not pay as aggressively as other areas in the market. It is still fairly cautious, especially if it is standalone liability. This does not make sense when we still see some absolutely crazy pricing on liability. Last month, there was an expiring £220,000 case, we offered £120,000 and it went for £90,000. It can't be right. We believed it had come close to bottoming out but that is definitely not the case in 2007. We have had liability cases this year where the renewal terms are lower than the claims outstanding and to me that doesn't make sense. How can they be writing for a profit?"

There has been a flurry of activity with insurers buying commercial brokers, and many in the market are wondering if there is any stopping this. Kerry London is naturally now one of the targets in this market. Samways says: "The interesting question is 'what is their end agenda'? Obviously, the more they buy they will attract economies of scale if they are going to run it as an independent business. I can't see, if Axa have paid what they have alleged to have, how they will get a return on their capital unless it goes direct. Insurance companies don't have a great track record of running brokers, so why would you want to go back into it unless you wanted to control the distribution? If that is their end goal, I see the juggernaut being maintained for some time to come. The interesting thing is, if you look at the top 250 brokers and if you want to get to that level, there are some key targets for them."

Could Kerry London head down this route? Samways gives a perfect forward defence to the question. He replies: "Never say never but I don't believe Joe would. He believes the more that are sold, the greater the value of Kerry London." So, how far does he want to grow Kerry London - already in the top five independent brokers? Samways is elusive, admitting there is a three year strategy, with acquisition targets within the M25 corridor, but says there is no set target, although he hints they would like to double the size of the business within three years. "We are particularly keen to pick up more teams, which could be in Lloyd's and that is one of Joe's huge strengths - the ability to identify winning teams. We don't have venture capital money and we have to be very selective. We managed to get Norwich Union back into the coach market, which took almost a year. We are the only broker that does ambulances with Norwich Union. We have a demolition facility through Zurich. We are trying to pick niche areas and develop through those."

Kerry London is also already mixing with the higher echelons of the insurance ladder. Samways comments on their connections: "We have this weakness in that we don't portray our size and yet we have great relationships with Andrew Torrance, Peter Hubbard, Simon Machell, Paul Greenwood and Tom Docherty. We mix with these people and yet the profile of our business would suggest we should not be anywhere near that relationship level. Our size opened the door (to these players) and when we talked about our strategy and the fact that Joe is such a long term player it appeals enormously to the carriers. However, like all relationships, they go through good and bad periods."

As Kerry London develops its profile in the wider market, the more acquisitors will eye its potential, and the harder Joe Kelliher will find it to stick to his independent style of management.

CV

2005: Group operations director, Kerry London

2002: Appointed to the main board of Kerry London

1984: Formed APN Insurance Services with Alan O'Brien, as equal partners

1978: Joined Cornhill as professional trainee.