Sell outs or saviours?

It is worth leaving brass tacks and business matters aside for a moment to note the way this seemingly incommensurable trio interacts. Despite being vastly different characters and with speculation that it could be a blood-on-the-carpet clash of the egos, there is a palpable click between them that is hard to fake. This seems to arise from a shared business ethos and conviction about where and how insurance meets the customer, as will become clear.

A more pressing matter for many though is the fact that this commercial alliance is bankrolled and owned by an insurer, which has bred deep suspicion among fellow brokers. Critics have been vocal and numerous - all citing the potential danger that an insurer-owned consolidator poses to the independence of UK broking. So, have the three brokers sold out and do they really believe most brokers will swallow the claim that they will retain their independence?

An edge in the market

Latest conscript Paul Meehan, group chief executive at Smart and Cook, is keen to respond first: "When we went into the deal I felt we had a real edge in the market and that it would be silly to give that edge away, only to then have to compromise. The easy way to give that edge away is to become a tied agent or give people the suspicion that you are going to be. That's why it's specified in black and white in the shareholders agreement that we - the insurance broking shareholders - have got control of the market and can show that to all our stakeholders, insurers, clients and all the people that have an interest in our continued success and survival. That was good enough for me. So, I believe we can continue to support all markets as we have in the past because we continue to grow. We're still acquiring businesses. Stuart has his pipeline of acquisitions and we have ours."

Stuart Reid, managing director at Stuart Alexander, adds: "Put simply, I wouldn't have done the deal had that not been the case. Independence is fundamentally important to us and I've said it before that we can only be evidenced by the actions we take. It has been four months since Layton Blackham and Stuart Alexander were acquired by Axa but in that time deals have been done with other insurers, which have been reported. The two main things that insurers should be concerned about when looking at our operation are the independence and the confidentiality of how we trade and we can only do that by showing people that we do keep confidences and we are independent and the actions to date prove it. I personally wouldn't want to be part of this organisation if that weren't the case."

So, Axa has paid all that money and is prepared to let all the other insurers get the value of that premium? "Yes," Meehan says, adding: "because if you go forward seven or eight years from now there won't be 4000 brokers, there will be 1000 and, if Axa has got control of 25% of the market, in the long run they will get more than their fair share of what's becoming a multi-tied market. There's only going to be four insurers working in a meaningful sense in 10 years."

Reid also sets the concern about the retained independence of Axa's brokers in the context of an insurer buying another insurer, which would be a greater cause for concern. "And that is coming," Meehan says. He continues: "It happened last time the market went to hell. The only thing you can do if you're losing at underwriting is to cut your costs - and that means mergers and acquisitions. Some insurers have been tipped to disappear for some time and they will go because they have shrunk themselves to a position where they will go off the cliff."

Reid also observes that these deals have been lauded as something different because they involve commercial brokers but adds: "Other insurers have bought many kinds of private lines brokers and the independence hasn't been called into question in many cases there. Our future depends very much on that and particularly as we're on an acquisition trail. How can we buy other brokers if we don't have access to that breadth of market? And don't forget Smart and Cook, Layton Blackham and Stuart Alexander were all profitable businesses before we were bought and we believe bringing them together will heighten that profitability across the three."

Fear of cherry picking

One reason brokers fear independence could be eroded by insurer-owned distribution is because of 'cherry picking' and, among those personal lines brokers mentioned by Reid, there is evidence suggesting this practice has gone on to some extent. Another concern involves the natural consequence of acquisition, where the parent will try to reduce the cost of dealing with its subsidiaries. If this were to happen, independence is surely in jeopardy as these savings could be passed onto customers leading to an Axa bias in their portfolios. So is Axa looking to cherry pick or cut these costs?

"Accountants would say we've got three businesses so there will be cost synergies - well not here," Meehan asserts. Reid follows: "There will be cost synergies as there will be with any broker on the market - we all want to get rid of the paper trail, for example. However, cost synergies of business through to another business absolutely not." He adds: "The simple shorthand for this is that Axa has bought into broking. It has a division that is UK broking, not that insurance is merging with broking, not that insurance has bought broking but that Axa has bought into broking and it has got models of this all over the world."

Reid refers to Canada as an example of where Axa made one mistake that was particularly costly but claims that the lesson has been learnt and a model developed that prevents the parent from diminishing the value of what it has bought.

Meehan explains: "If you buy a business like this and start to imprint management into it and synergize all the costs, you're changing what you bought. The best thing to do is just change at the edges, so you don't kill the essence of what you've bought."

In terms of another common post-merger activity of merging branches, Reid says because geographically the businesses do not cross over there is no need in their case. "This is a platform to grow, not to strip out costs," he adds.

Another criticism of consolidators generally is that they are models of scale and little else. So what is the model going forward - do they want to get bigger for the sake of getting bigger?

"We've reached our first major objective to get countrywide coverage and there are no plans at the moment to buy something as big as Smart and Cook," Reid says. He continues: "We want now to look at the small to medium-sized brokers and look at the efficiencies we can bring. We wouldn't rule out another big one but it's not in the plan at the moment. So we now have critical mass countrywide and a base to build on."

Joining the debate late, after being stuck in traffic, Chris Blackham, chief executive at Layton Blackham, adds: "We can now be selective and we can go for the quality we require and what fits our business mix and we've been flattered by the attention."

Meehan also chips in that brokers are attracted to them by the stability of their backer, with its obvious advantages over VC, private equity or other temporary investors.

The right future

In terms of the interest this has generated, Reid comments: "Some have an inflated view of what they're worth but we bring them down to earth quickly. The great thing for the business, as Chris says, is that we are able to choose what we want to buy not what we have to buy which is a good position to be in."

Blackham adds: "It's also about the people who want the right future with us and want the right flavour of company and like our story."

Meehan explains further: "Most of the other big players are moving to a business transition, be that an exit or float or a sale, and we've come through that and we'll carry on the business models we've got - they are successful and the three businesses are different. So, we see the three paths going forward but as we go forward we will compare and get best practice and eventually some savings such as with IT."

Reid explains that Meehan has access to some schemes that would work well with its southern branches plus further benefits are to be had from Layton Blackham's network franchise. He adds: "So it's positive, it's real growth, and it's being able to market products that we didn't have before."

In terms of the rebrand, originally destined to be announced 12 months after the first deal, the three have already firmly settled on a name. At the time of writing consent had not been given by Axa but that seemed to be a formality. Meehan explains: "It doesn't mean anything, and I like it because of that but also it has a ring to it and I also like it because it cost nothing." The name will be announced shortly, and will displace Axa's existing and unfortunate VPL.

Back onto the serious business of how staff at the three brokers are faring during a tumultuous period, Meehan says: "When you introduce this kind of change into a business it destabilises it, and some people will think they need to get out because they are vulnerable, which is an inevitability. You have to manage by talking and talking and talking to staff."

Blackham adds: "You will also find your staff being invited to talk to competitors - it's a competitive market and the competition will take full advantage."

Reid expands further: "We have all put a lot of time and effort in to keep staff informed and get the communication right, to ensure people know what is going on and to keep them up-to-date about where you're taking the business. It's when they are shocked by news out of the blue or not advised before then that makes them nervous."

Blackham also states: "I'm not concerned about any of my good guys and I'm happy to say it. All our guys talk to everybody in the market and if you've got good people of course they're going to be courted - they might hear what has to be said but it doesn't mean they will actually leave."

"And why would somebody want to leave something like this?" Reid says. "While I'm obviously bound to say that we are doing something bold that has set the agenda to an extent. What I told my staff is that it is the opportunity of a lifetime and it's vital to communicate all of that belief to staff."

In terms of opportunities for staff, Blackham adds further: "The other thing is that we are a very big company but we're not going to be around for decades. The guys are coming up with tremendous opportunities capital-value-wise and career-wise, which you don't get in many other businesses."

Meehan adds: "If you went through the independent market there's maybe between eight and 10 consolidators or businesses expanding and acquiring and there are three of the best here. So for brokers contemplating the exit gate - float, sale or whatever - they now have the option to go to a business that is pretty well set permanently with fantastic solvency. Axa is the fifteenth largest company in the world by revenue - that's real security."

Reid also refers to the Professional Broking Broker Management Forum in January, where a listener poll showed 83% were against insurers buying brokers as they feared it threatened independence. However, this concern was somewhat undermined by a later poll that showed that 73% would sell to an insurer.

Too many cooks?

In terms of how the management structure will work, surely three chief executives is the same as too many cooks? Reid says: "The three of us will share the roles equally and will have specific remit across the group for specific responsibilities."

Meehan continues: "We will all be chief executives running our own business - so there's no change to where we were before the transaction and we will have cross-border responsibilities in complementary areas such as public relations, compliance and IT, and we have split those up between the three of us."

So what about the IT - will the three brokers all move to the same platform?

"There has been no decision as yet," Reid states, summing up the problem further, "there are massive advantages of going onto one system but there are also massive hassles in doing so. The acquisition strategy is the primary focus for us currently. We believe we are in a period where this activity is heightened and we need to take advantage of that. And that is where our focus will be for the first 12 to 18 months."

Blackham explains that one aim is to be the leading small to medium-sized enterprise broker in the market, which, with Towergate as the current number one, may read as fighting talk. In its latest accounts, Towergate reported £1.5bn of GWP compared with the combined group's current £400m to £450m. In the short term, another £60m is required to reach the magic half a billion, beyond that the plan is to eventually double it to £1bn.

Reid says: "We are very different to Towergate and I think the way we run our business is in a much more independent way. It has been successful but it's not a model we are following - we have a different appeal and we're a very safe home for clients and staff and the companies we buy. Towergate has been successful and I think this is the only way they were going to get any serious competition."

Reid admits that the current level of interest from brokers may wane in future, at which point it may have to acquire more opportunistically. He is therefore reluctant to talk long term strategy. He says: "Setting a target for five years is fundamentally flawed because it depends what and when you buy. We wanted nationwide coverage and to get to £500m but what happens beyond that is subject to further discussion. If rates were to go up on £500m that would be a huge increase right there."

So, are some of the new group's hopes pinned on a hard market soon? Meehan says: "The figures for 2006 are looking good for everybody but it's the 2007 figures that are looking bad, and those will be coming through in 2008, so if you said mid-2008 to third quarter 2008 you will start to see it harden. I think it will be a slow harden unfortunately as there is too much capital around for it to be anything other. But there are other factors - election change, interest rates going up, it's a difficult one to call."

However, Meehan does give more detail on the growth objective: "With the business we've got now if we can't buy £150m of volume premium each year it's a poor do, as we have the machinery, the scale and the appetite to do that."

So is that a target? "No, but it could be a lot more," Reid says. Meehan adds: "I always felt for our business we could buy 25% of our volume each year - personally speaking that was a belief and, yes, a target."

When asked if they are exploiting Axa's paranoia that the likes of Oval and Towergate will lead them to losing market share to NU and others, Reid responds first: "We're not exploiting anyone, Axa has made the decision to get into broking and they're happy to do so."

Meehan concurs: "Axa has made the decision to buy distribution." However, he adds: "That decision has been born out and driven by a lot of factors and what you mentioned might just be one of those factors - it might be."

"But a 10% increase in rates would wash that problem away - it's a moment in time and you can isolate many factors," adds Reid.

Meehan continues: "There is a bundle of other factors. This is a finite market and there are the cycles, and that makes your bottom line very vulnerable. To keep your volume you've got to price in the cycle and that's just a crap place to be. If you make profit and want to make more profit you've got to follow the pricing, so everything goes down and you lose your shirt but if you buy the distribution in the long run then that is very attractive."

Reid says: "It would be very easy to say it has been bought to protect the market share that Towergate has with Axa. But don't forget Axa has also bought Thinc Destini, Swiftcover and Secure Health - distribution across the spectrum."

Meehan interjects: "So, while it's the subject of industry conversation that it could be an offset to Towergate, it's ultimately parochial thinking - it's Towergate thinking."

Blackham adds: "Worldwide, Axa is a client-facing company and in the UK it is 90% intermediated, so there's a natural step for an acquisitive company to get that retail face. Henri de Castries, Axa president, said he wants to buy elsewhere in the world, so it will do it elsewhere as well. We'll get no better or worse deals to Oval and Towergate, so it's not actually threatening to them it just means there is another player, which makes things uncomfortable for them."

The long game

The universal answer, when asked what the period of the contract earn out is and what the length of the service contracts are, was "none of your business," said almost simultaneously by all three. However, Meehan reveals that "I think we will all be here for at least three years." To which Reid quickly says "I won't!" meaning, as the younger of the three, he will be there longer. Meehan continues: "We've got a lot of succession and a lot of young people in the business - it's not run by old men in suits."

"We wouldn't have done this for the short term, we've got serious skin in the game," Blackham opines. Meehan follows: "We've all invested millions of our own pounds so it's not going to be a holiday camp. We didn't want to go via venture capitalists, we wanted to go to someone who understood our business."

When asked how long they are covenanted to not compete against Axa should they leave, the question is met with a discussion around breeching confidentiality agreements. Meehan is on the verge of saying six months but then actually comes back with: "Put it this way, when all of us stop we won't be in business with anybody else, so when we finish with this business we won't be working with anybody else."

Regarding details about the next acquisition after the three start-up blockbusters Meehan says: "The pipeline has got business from £5m to £100m in premium, and everything in between, and the common thread is that they're all profitable businesses and they like the message and a lot of those came to us."

Blackham comments: "If there's one message I'd want people to take away from this about what our future model looks like, it would be to keep the UK-wide footprint and to keep quality people next door to their clients. We want to be everywhere and want to have local offices everywhere."

Here lies the most tangible common thread that unites the three brokers. Meehan goes on: "Our strap line is 'national voice, local accent' and I read something in Axa's briefing notes with the exact same sentiment put in a different way and Layton Blackham's is local personal service from a nationwide company, so we are all coming from the same place and that's the differentiator. Ultimately, you have to do something in business that your competition can't copy and our competition will never put people on the ground in Scarborough or Skipton but these guys make a difference and win a lot of custom."

Reid adds: "Another thing we are doing is looking at offices in certain areas, and each building we've looked at is where an insurer has left, not just the building but the area. So, we're populating some of the areas that insurers have moved out of and providing that local service amongst a range of insurers and keeping the local service."

Meehan follows on: "The argument for acquisitions is to do smaller ones now as they are cheaper, less risky and more profitable with better uplifts. We expect to have more acquisition news in the next two months of possibly three purchases."

Back to Reid: "I'm keen to put a few more to bed over the next few months to establish the message in the market that we will continue to acquire. It will be profitable businesses and also keeping the momentum. It's not going to keep being 'big bang', we want to do it sensibly."

Reid concludes: "Although the businesses are very different, the philosophies are very similar, staff focused, client focused, good relationships with insurers - yes, apart from Axa - they are invaluable to what we do, which is quality business at the right price. And all these things we have built our business on is what the new group will stand for."

CV - Stuart Reid

2005: Managing director, Stuart Alexander, after leveraged buyout

1993: Established Stuart Alexander with Alex Shead

1989: Account executive, Mansons Insurance Brokers

1986: Account executive, Bishops Skinner

1998: Apprentice, Reid Insurance

CV - Chris Blackham

1984: Established Layton Blackham

1977: Joined Royal Insurance Group

CV - Paul Meehan

1991: Group managing director, Smart and Cook

1987: Joined Smart and Cook

1984: Managing director, insurance broking business, Charnley Davis

1979: Branch manager, The Bolton Group

1974: Insurance broker/account executive, Phipps Charmley

1970: Manager's clerk, National Westminster Bank.