Innovate to accumulate

You could easily be forgiven for thinking that the common stereotypes about insurer chief executives as austere, measured characters fits Peter Hubbard more neatly than his counterparts. However, as he will later reveal, this is a veneer behind which the severity of internal panic can be measured by the degree of outer calm on display. And, given that Axa was haemorrhaging £200m a year when he joined five years ago, the foil has certainly had its uses. Having taken the company through some major changes in that time, Axa UK is no longer sinking and last year turned in some impressive figures, with profits up 16% on the previous year to £308m. Hubbard is now on a mission to plug what he regards as the comparatively smaller leaks; broker service being the most notable, which undermines his efforts to date and continues to cause broker opinion of Axa to list badly.

Although Hubbard seems to have broken the back of Axa's fortune reversal in the UK, he does not consider turning companies around to be a core skill. He is, therefore, very much on board for the foreseeable future to push hard a company he has spent much of his tenure fixing.

Fixing the basics

Taking the broker service question head on, Hubbard admits: "Over the past few years, while we have been through a process of significant change, we have forgotten to do some of the simple things really well and right first time, and we have a big drive across the organisation to try to make sure we can improve those simple things."

So, what would he say to brokers that feel Axa is not prioritising or investing in service, as it should? "I would say that our service can be fantastic but one of our challenges is that it is not as consistent as it ought to be but, as ever, people remember the bits that are not as good as they should be."

Hubbard then sets the problem in context and spells out the challenge: "The reality is that although we have nearly twice as many policyholders as we had five years ago our level of complaints is 25% of what is was then. So is that good enough? Absolutely not. Do we know what we've got to invest our money in? Yes, and we've got a programme ongoing at the moment called 'fix the basics'. That is easy to say but actually it is not quite so easy to achieve. Big change programmes are sometimes easier to deliver than lots and lots of small changes. Getting the final details right is ultimately what drives the customer experience."

Hubbard concludes: "We are very conscious of the fact that brokers consider that no insurer is getting service right. So it's not only an area where we can gain, over time we want to differentiate ourselves but it is easier said than done."

Hubbard also remarks that insurance in the UK has a worse reputation for service levels than it does in other markets Axa operates in. "Customer expectation in the UK is different because the market place is very competitive. I think we are more consumerist, which is not a good or a bad thing - it's just an observation," he adds.

Another anxiety of brokers concerns insurers dealing direct, a strategy which, following its acquisition of Swiftcover, Axa is revisiting. Given that the critical mass for a direct operation to work in the UK is typically one million customers, how much is he expecting to spend? Some have suggested that below £100m it is unfeasible.

"If you were setting up a traditional direct model, which I have done when I was at Lloyds TSB, of having to set up a call centre and put huge amounts of infrastructure in place, you have a high fixed cost base because of premises, equipment and telephony and so on. So, to get any sense of scale and to get the margins to work properly on the products there are those costs. However, the point is that model has changed and if you're setting up an internet-only operation you don't have that. Visiting Swiftcover in Woking there isn't much to see and hardly anybody there apart from the IT people but not a lot else. So there are not as many high fixed costs.

"The other bit of it that is important is that historic methods for acquiring business including those tried and tested methods of door drops and Yellow Pages inserts have been completely superseded by the internet. So it's really about how efficient you can get your lead generation to be, using whichever form of internet source you've got. So the economics have changed."

Because the internet has cut the costs of going direct, Hubbard says having a million customers is not necessary to turn a profit, although obviously he stops short of stating Axa's critical mass target via Swiftcover.

About brokers concerns around Axa going direct Hubbard says: "Only 5% at the moment - subject to absolutely finalising Swiftcover - is our direct commercial operation. We've lived now with the inherent, I won't say conflict because different customers buy things in different ways, but in some brokers minds there is a potential conflict between being intermediated and having a direct operation. I'm not saying there won't be the odd cases of conflict as that would be stupid but in the main we have got that model to work well for us. So, brokers will have to judge us on what they see when it emerges, rather than judge us on speculation."

Broker acquisitions

One of the biggest Axa developments to hit the headlines regarding brokers was when it acquired Layton Blackham and Stuart Alexander in January. However, since then many brokers have said that they do not trust Axa to be able to resist favouring LB and SA with competitive rates when in a head-to-head battle. So, regardless of how Hubbard manages this, is he surprised that there is now a trust issue with Axa?

"My first observation is people are talking like we are the first insurer to buy brokers. I accept the fact that in the past five years insurers have not been buying commercial brokers, although RSA bought commercial brokers some time ago. Part of me thinks, is there a difference between the commercial and personal market in reality? I think that the large insurance brokers in the personal market have been used to competing with each other for many years but in the commercial market, which has been much more localised and regionalised, brokers have not been used to competing with that many people. We didn't start consolidation in the UK market - other people did that. So, I think that commercial brokers are waking up to the fact that they are competing with more people in their local markets than has previously been the case. There is a bit of a reality check in the market going on with brokers competing from outside territories. So the market dynamic for brokers is changing.

"The other point is that 95% of my business comes from intermediaries or corporate partners. We are one of the most heavily intermediated businesses in the UK market and last year I wrote £1bn worth of premium in the UK. So, the acquisition of two brokers which represent a reasonably small proportion of that overall shouldn't be seen as a threat to my relationship with the other brokers - why would I want to damage the largest part of my business? Do brokers believe I may do it? That's up to them to answer but, economically, madness would lie in going a route that would damage all those other relationships. Importantly, we haven't said LB and SA won't try to expand but ultimately we have to let them run their own business."

It is a little known fact that before Axa acquired commercial brokers in the UK it learned the hard way in other territories, notably Canada. So what happened there - did the parent try to apply culture or methods that in retrospect were not fitting?

"From my perspective there were two big things we learnt in Canada. First, you have to have commonality of purpose with management when making acquisitions. It's very easy to rush off and make acquisitions where it looks financially fantastic but if there isn't commonality of purpose you can end up with a great financial deal but it can all go horribly wrong. And you can see so many mergers and acquisitions in the market littered with examples where the management stuff didn't work. So that experience figured strongly in our purchase of SA and LB.

"Secondly, the Canadian experience also highlighted the importance of having somebody that is independent from the rest of Axa, which Sean Hooper is fulfilling to act as a conduit but also a protector of the acquired businesses. His role is to represent the interests of the acquired businesses and the shareholders. It is tough job but we learned in Canada if you put in a role that is other than that, for example, a direct management role to manage those businesses, it won't work, because you can't keep the separation. So the role we put in place is virtually identical to what the guys finally put in place in Canada and it is what I would describe as an ambassadorial role - acting as an interface between two organisations."

At the time of writing Stuart Reid and Chris Blackham were in Canada to glean further benefits from Axa's three and a half years of learning about how to make commercial broker acquisitions work.

A great year

To the question were the LB and SA deals done because Axa is not doing so well on the insurance side? "No," is Hubbard's emphatic reply. "We had a great year last year; 19% increase in profit and 9% up on revenue, which I think was in fact better than anyone else in the market and we've also had an amazingly good start to 2007."

In terms of where Hubbard sees the market going - and possibly hinting at an area of interest for Axa, he says: "It's been happening for a while but I wonder if this distinction between manufacturing product and advice is breaking down. There are some big consolidating names in the market at the moment - one of which actually underwrites its own business - Primary Group has a carrier. Whether, ultimately, Towergate would move in that direction I don't know. I see a change emerging and I think the traditional roles of insurance companies and brokers is due to be the next great market shift. So, in terms of where the market is going, if brokers can think about underwriting, insurers can think about advice."

In terms of other views about the market's future, Hubbard does not subscribe to veteran analyst Tony Cornell's view of 20 broking firms controlling 80% of the commercial market in five years. However, Cornell's latest annual review published in February claimed that 20 businesses comprising international brokers, larger networks and the top 10 independents already control some 63% of the commercial market. This is a trend he thinks will increase to 75% by 2010. So, what does Hubbard think will arrest this trend?

"My first job at Lloyd's bank was in estate agency and we were huge consolidators of the estate agency market. And I can't help but think that in a very competitive market, which UK insurance certainly is, as soon as you get consolidations people forget that new entrants come into the market. So, yes, the UK broker market will be dominated by fewer big players but you can't project that to the extent that it will be totally dominated by a few big players because it's a people market. It's not like banking; creating a money transmission system would probably cost you £500m. So, the cost of starting up as an insurance broker, even with regulation and compliance, is still relatively small. I don't think consolidation will be an endless train, and the challenge with pure consolidation, with no tangible benefits, is that it is just a model of scale and not one that will ultimately differentiate those that do it. That's why there will be new entrants because they will say these guys have lost the plot with their customers and come up with a new customer proposition."

Consolidation research

About the consolidation of insurance companies, Hubbard supports his views with some research conducted by Axa. "We actually found that there are exactly the same number of UK registered insurance companies today as there were 30 years ago - exactly the same number." The reason for that, he says again, is because every time there is consolidation new start-ups come in. He continues: "For example, Quinn and some of the American companies in the UK increasing their trading. So there is a shift in the market towards 'bigger', and then you get those that enter with new models."

Some in the market have suggested that, after a period of stagnation under Dennis Holt - who made no acquisitions over five years, Axa's UK growth strategy is fuelled purely by Nicolas Moreau - is it true that Paris now runs UK strategy?

Again, Hubbard replies with an emphatic "No."

"That is absolutely not the case," he adds. "I've been here for five years. For the first three years we were losing £200m a year. So, asking for funds to do acquisitions was an absolute no-no. During the time of Dennis being group chief executive we had some businesses that were pretty damaged and needed some major surgery. The thought of making acquisitions during that era was never going to happen. My second point is we decide what our strategy is going to be, and then we ask the shareholder to support it. The group operates in quite an autonomous way, as is the group style, but then they challenge us over what we want and how we are going to get there."

Hubbard says that the challenging ensures the ambition and the methods of achieving it are robust. He adds: "We have always had challenges but also amazingly good support from the group over what we've needed to do. That applies in the tough times when we were trying to turn the business round, as well as at the moment, where we have some big challenges to deliver our ambitions for 2012. And we are looking at being perhaps a bit bolder and more innovative."

He concludes: "I don't think anyone in Paris has told me what the strategy is, because I don't think anyone in Paris knows the UK market as well as I do."

In the longer term for Hubbard personally, he has no fixed plans and, despite being in the hot seat for five years, he is not looking for a fresh challenge.

"I have had many varied jobs. I worked at Lloyd's TSB for 17 years and had some fantastic jobs during that time. Taking over this role, the first three or four years was a huge business turnaround project and, while I had a lot of experience of business integration, I didn't have great experience of turning businesses round, that wasn't where my skills set came from.

"So, my role has changed over the past five years from turnaround, and we're always going to have to make tough decisions at whatever point we are, but we've moved on from the decisions we needed to make to turn the business around to a set of completely different decisions in terms of how we are going to deliver our ambition by 2012.

"Some things have stayed the same, my passion for how we engage our people and communicate with them, and get the organisation to join up and make sure it is clear about what it needs to do and get it to uniformly go in the same direction is still there. However, my job has shifted quite a lot so I'm enjoying it, and now and there is still a lot of other exciting and challenging stuff to get on with."

A well-known figure

'Not a lot of people know that' was Michael Caine's line; is there something about Hubbard not a lot of insurance people know which would be illuminating for them - or at least give them an enhanced sense of who Peter Hubbard is?

"There's probably not a lot people in insurance don't know about me, I'm not a particularly private person. One of my secretaries read me right about 10 years ago when she said I have a theory about how you operate and her observation was: the more panic stricken you are becoming on the inside the calmer and calmer you look on the outside. And she was absolutely on the nose. I had some psychometric analysis done later on which confirmed that," he says leaping up to draw wiggly lines on a white board, "and some one described me like this, I don't fluctuate that much, I do fluctuate a little, but when I hit a crisis I flat line and take control which comes out as me looking very relaxed. Whereas other people when they hit a crisis fluctuate wildly. Perhaps the lesson is when I'm looking very calm you might not want to be in the room!"

CV

2001: Chief Executive, Axa Insurance

2001: Director strategy and planning, UK Retail Banking, Lloyds TSB

2000: Managing director, e-Commerce, Lloyds TSB

1999: Investment director - group efficiency programme, Lloyds TSB

1997: Finance director (finance, actuarial, underwriting and strategy), Lloyds TSB General Insurance

1996: Finance director and programme director, Lloyds Bank Insurance Services

1993: Finance director (finance, planning and IT), Lloyds Bank Insurance Services.