Phillip Hodson - In the Oval office

Former cricket and rugby player Phillip Hodson is a big character, in every sense of the word. However, behind the imposing exterior is an astute Yorkshire businessman and the central figure behind an ambitious business strategy to establish Oval as a national 'one-stop shop' for its clients.

This idea took root in 2003 when Hodson was approached by Ben Thompson of corporate financier Noble and Company. Hodson says he was sitting in his office "bored" and considering how to double the size of his business. He was impressed with Thompson's idea of creating a £150m income broker and gave an affirmative answer "within ten seconds". London-based investment house Caledonia Investments - which Hodson stresses is not a venture capitalist - then provided an initial investment of £15m, which has since increased to £25m. In addition, a joint bank facility, through Barclays Leveraged Finance and Lloyds TSB Corporate Acquisition, of £53m has been set up, and there is the potential for more. Hodson works closely with Caledonia, which has a 37% stake in the business and approve all acquisitions.

Hodson's aim is to offer a complete service of risk management, healthcare, general insurance, corporate life and pensions and wealth management. "We are not the finished article yet and no other broker has done that successfully - not even the big boys," he says, adding: "We run the company as one, on an integrated basis." One of the surest signs of confidence in this model has been the unification of its insurance broking and financial services operating boards, with Jeff Herdman becoming group managing director after previously heading up broking.

Way before all of this, Hodson was educated at Cambridge and spent five years in South Africa where he played rugby for Western Transvaal and was branch manager of life company Guarantee Life at Anglo American.

He returned to Wakefield in 1977 and his father Richard Peter Hodson, who had set-up RP Hodson in 1965, placed young Phillip at the helm of the family firm. Turnover was £25000 and Hodson went out knocking on doors to sell insurance and pensions. Hodson senior remained in the business until he died in 2001 at the age of 78. Hodson says: "He laughed a lot like I do - and we laughed the whole way through his funeral to which over 1000 people turned up."

The business enjoyed modest growth and, by 2003, RP Hodson had an income of £10.5m controlling over £60m of gross written premium. The previous year, Hodson had acquired the client base of Williams and Whybrow, a specialist marine cargo and energy broker. Since establishing Oval in October 2003, it has grown to an annualised turnover including acquisitions of £57m, with its latest results for year end 31 May 2006 reporting record earnings before interest, tax, depreciation and amortisation of £9.8m on £48m turnover. Gross written premium is over £300m, while turnover is up from £34m; EBITDA up 63% from £6m. Next year, he estimates the £57m to grow to £80m within the year with around £16m of EBITDA.

One of the first RPH acquisitions was Leicester-based Bland Bankart. According to Hodson it was the only one that was for sale, while all the others have been "target" acquisitions, adding: "We are trying to form a small £150m to £200m national broker - if it goes beyond £200m we might lose some of our personal service."

In terms of Oval's attraction, Hodson says: "They come to us because of culture - we have to be competitive on price but not the highest. We are not prepared to pay silly prices - we will pay in line with the expected profits of that business. We look at a price earnings ratio of around four to five times pre-tax profits. The management take a meaningful stake in Oval shares - they like the integrated model and are left alone to run a region. You must try and keep the senior people on board. You can't just buy a business on model."

Hodson brushes off the suggestion that staff roles may be duplicated by others within the group. He comments: "So far there hasn't been a clash in terms of jobs, and there is nobody who has left the business who has worried us." He continues: "One of my few skills is that I can inspire people and we have a good team ethos. Choosing people is a gut feeling. There is a balance between the likes of Peter Beddis, Nic Hamblin and the new staff we are bringing in from Aon and Marsh." To date, Oval has 700 staff with 150 in financial services but this is set to expand significantly.

Oval is currently in negotiations with six insurance brokers and two financial services companies. Hodson says: "We are looking for city brokers - we are buying in the South west, central Scotland and Yorkshire. The smallest office at Oval has a £2m income while Leicester has a £20m income including financial services."

Plans to expand

Hodson has further plans to expand, and acknowledges the company's strengths and weaknesses across the country. He says: "We are very much in the East and West Midlands, with a bit in the West Country, Yorkshire and London. We need to be in Scotland, Manchester, the North east, East Anglia, more in the South, and possibly Northern Ireland. We might want to grow in Europe, where we have strong connections with brokers, but let's walk before we run." He reflects: "To be a national broker we need to have operations in Manchester and Bristol, and the other cities you'd expect. We shall open in Manchester - you can't neglect it as a market."

However, he rules out buying brokers that have lots of small offices, such as Country Mutual Insurance Brokers, which was recently bought by Towergate.

Acquisitions to date include Williams and Williams in Leicester (December 2005), Beddis and Partners (December 2004) in Birmingham, and Lloyd's marine broker Lochain Patrick (June 2005). Recently it bought the corporate commercial book of Sheafmoor in Sheffield, with a staff of 12 and an income of £1.2m.

When asked about attracting brokers he comments: "You need to know the people and their background but sometimes it is a matter of timing; they are all frightened of scale. We have over £300m of gross written premium but we need £1bn. Most of the businesses we buy have a strong corporate and commercial book, maybe with some small to medium-sized enterprise and private clients."

Oval concentrates on risk such as oil, energy, latent defects, construction, property, professional indemnity and credit. It has fees of £6m in marine hull overseas and £2.5m in oil and energy.

When Oval acquires, the new recruit is introduced to its Allianz SME scheme, and is brought up to speed about Oval's culture. It's finance operation is centralised, as is the firm's compliance. Within 18 months it can begin integrating other services.

The advantages of bringing brokers together into the same company are predictable: better earnings together in terms of commissions. Hodson comments: "We have a level playing field and have turned down higher levels of brokerage from two of those insurers. Scale allows clients to get better deals and advice in risk management. We have the scale without losing the close personal service - I still get letters from small clients or even household policies and ring them up straightaway to sort them."

On the fee/commission debate, Hodson says: "Commission disclosure is not a worry for us. A lot of our business is on fees (between 40% and 50%). Although they are dangerous, it is whether you charge the right level as many brokers undersell. You have to look more like lawyers and accountants on the time you are spending on the risk."

National competition

When asked about the competition from the nationals, he says: "We are taking business from the nationals, and some key staff. We would rather be compared to them than others in the market place. Their problem is that their overheads are very high. They make all their money from reinsurance, consulting and employee benefits, and their retail operation was burdened by huge central costs."

On the challenges of integrating financial services and broking, Hodson says:"The challenge is to mesh the cultures. Even though insurance broking is a short-term business, it is a long-term culture embedded with client care. Some financial services business is very short term - make the commission and off. The insurance broker will buy a solid car and look forward to his pension while the financial services guy will buy a BMW with a fancy stripe on it and look forward to his bonus. There is a different philosophy - the other challenge is that they don't like to cross-sell because they are frightened that one will ruin the account for the other. You have to be positive and ensure you have quality people in all your operations. The client wants to be able to dip into the arrows in your quiver - they might not buy everything but it should be there. At the moment we are weak on healthcare and wealth management but are looking to strengthen. The client wants a 'one-stop shop', we know that, but not one that sacrifices expertise."

Hodson continues: "You can't go out and do what Phillip Hodson did thirty years ago and sell both sides of the business (financial services and insurance), but what you can do is to create one client contact. There are very few people who are trained to sell both pensions and general insurance."

So what is the end game? "We might float. The history of floating companies from the insurance sector isn't very good. At some stage how do we let senior people like Peter Beddis realise their share value? The options are a venture capitalist, a trade sale, an American broker, a bank or an insurer. We've already had several offers but the aim is to try and stay independent. That might mean we need to go in for a flotation for the realisation of share value."

So you'd be happy to work for someone else? "It depends. I don't need to go to work, I do it because I enjoy doing it. Am I obsessed by control? No, I'm sure there are better people out there who could run it. The main thing is, is it right for the clients or the staff?"

Regarding the trend of insurers buying brokers, Hodson comments: "Nobody in the industry knows what insurance is going to look like in five years time, there is open debate - which is healthy - but unfortunately a lot of it is in secret. If an insurer buys you are they going to single tie you? It's something they can't get their heads round themselves. The Financial Services Authority is watching this - could you become a single distributor? Our business would be very difficult because we have lots of clients, and I don't think one single carrier could provide all the solutions. In Europe it is a different model, as a lot of the big clients are dealt with direct by the big insurers. There is no doubt that in the UK there is a fear amongst insurers that they don't control the end client and that they could be deemed to be held to ransom by some of the brokers on earnings. Yet the client recognises the insurer brand more than the broker brand but it will be difficult to break the broker model." Perhaps thinking aloud, Hodson adds: "How many brokers of substance will there be in five years time? There will be very few, won't there?"

Traditional markets

Are the likes of Oval contributing to a decline in the number of staff at insurers? "That is correct - consolidation is making insurers reconsider their branch networks. If they were starting from scratch again would they just have people servicing the big brokers rather than branches which are cost ineffective? They could have underwriters sitting in our offices, couldn't they? At the bottom end in the SME market they are trying to control the client but they haven't been very successful.

"Between 5% and 10% of Oval's business is through delegated authority schemes, an underwriting agency and a captive. Oval also has a wholesale arm which takes care of oil and energy and some marine to Asian and European brokers. We might use the underwriting agency for our own vehicle."

In terms of brokers taking some of the premium away from traditional markets, Hodson says: "We find captives interesting - we could use them more and more for some of the corporate vehicles at lower levels. At the moment they are used for specialist European risks. We develop a scheme and a captive, and go to an insurer which will help with the reinsurance. We trade conventionally 90% of the time but we could look at developing these other routes. We are still using sub-brokers such as Windsor because we haven't developed our Lloyd's team to serve our regional brokers yet. In the meantime, we are sticking to buying brokers and financial services firms and we expect Oval to be keeping journalists very busy this year."

Another debate in the market concerns when it will become hard again. Hodson considers this to be two to three years away, and for property casualty and liability up until 2009. "A lot of insurers haven't factored a hard market into their model, a lot have accepted it could be a bit of a long haul," he says. "Some insurers are acquiring some huge worldwide risks and they are buying in massively, giving clients 30% hellos, and a lot of them are three year deals. It is an issue and I hope I'm wrong. There have been less fires, the weather has been benign and a lot of their loss ratios are pretty good. The one area they are losing money in is motor and they're going to have to do something about that."

Oval is certainly gearing up to be one of the 'few remaining brokers' in years to come. Hodson reflects: "We are about one third of the way on our journey. This is my hobby and I'm still learning everyday."

CV

2003: Chief executive, Oval

1977: Managing director, RP Hodson

1975: Branch manager,Guarantee Life at Anglo American

1975: Yorkshire CCC.