Steering to calmer waters

Steering to calmer waters

Jerry Clayton has seen many a twist and turn after setting up LFC in Essex in 1988 at the tender age of 23, including falling out with a former business partner, which led to his firm’s survival being left in doubt. Hence, he is in an upbeat mood about having to tackle the current economic challenges. He admits it is tough, that some of the givens of the past have been put firmly on hold and that belt-tightening is essential.

Further evidence of this harsh economic environment in insurance was seen in June with Axa UK's decision to shed another 560 roles; including 120 in Ipswich; while on 15 June, news broke that Axa PPP Healthcare was quizzing its staff over making a choice of either 300 job cuts, a 10% cut in wages or a two-to-three year suspension of bonuses; talk about stuck between a rock and a hard place. Meanwhile, RBS's billboard advertising at airports is looking distinctly out of sync with the times, as does AIG's logo on the shirts of Manchester United: these two powerhouses have been humbled by the downturn.

Clayton is refreshingly honest about the difficulties he faces as an owner-manager: "We are asking our people to dig in. Everyone is aware of the situation and we have to introduce a short-term pay freeze. We have also stopped our annual golf day [a regular in the diary for the last three years], which is now considered a luxury. Several employees have left through natural attrition not to be replaced and plans to build a state-of-the-art office have also been shelved, to such an extent they are considering selling the plot of the land where the project was set to go ahead, albeit at a profit following changes in planning legislation.

Small measures such as examining expenses and introducing hot water points to replace kettles and save time have also been introduced as attention to detail across businesses large and small comes into vogue. Another way that Clayton is looking to save some money is by offloading the broker's small motor book [he is down to a short list of two at the time of writing], though he is concerned that his clients should receive the same level of service as they do at present.

As companies cut back - unemployment levels could rise to three million people next year - they are looking increasingly for the best insurance deal, making organic growth, or even standing still tougher and tougher. Clayton explains: "Wages and turnover are dropping like a stone and add-ons such as directors' and officers' and legal expenses are not options any more. Several clients have gone bust; it is less embarrassing to do so in this environment. Retention is harder than ever."

Commenting on the latter point, he adds: "There is a lot of movement out there and more competition. Each client is slightly different in its approach.” Though, like most, Clayton recognises insurance broking as "a lot luckier than other industries".

Antipodean assistance

Despite these concerns, Clayton can be bullish about the future after securing funding through Macquarie Bank. The Sydney-based operation is increasingly active with UK insurance brokers, helping, for example, in the management buyout of the broking arm of Berkeley Burke by Tim Maxted and Andrew Bedford (see The PB Interview, November 2008, p.30- 33). Reassuringly, the Australian bank is notable for its overall success in these credit-crunched times.

The funding request came after LFC was almost sold to a large consolidator but protracted negotiations were terminated suddenly, presumably partly as a result of the prevailing economic circumstances – although Clayton was never given any explanation. He also rejected no less than five offers from private equity houses, citing their wishes to have well-paid nonexecutives on the board as a problem.

Clayton was forced to look for alternative banking arrangements when the broker’s regular bank, RBS, refused his request for goodwill lending. Clayton approached Macquarie in January 2008 originally and an offer of funding was made within a week, conditional on a Financial Services Authority audit. Following a comprehensive 200-page report from RWA Associates that pronounced the broker as having a clean bill of health (though some useful recommendations were made regarding training), LFC announced its refi nancing in April 2009. The money from Macquarie will help propel the broker to its target of £50m gross written premium by 2012, up from just over £30m today.

By the end of that same month, the broker completed the first acquisition of its new era, buying Chipping Ongarbased Roundhouse (near Brentwood): a 90% commercial lines, £2m GWP broker from which the owner was retiring. This is almost a bread-and-butter acquisition for Clayton (he has made more than ten of them, predominantly in Essex), with the largest purchase being Brightonbased Mainstay in March 2007. Spread over two offices in Bexhill and Brighton, LFC consolidated them into one in Eastbourne that is known now as LFC Mainstay. The focus for the broker is very much on commercial business in the South-east; clients range from scaffolding contractors to newsagents.

Depending on the opportunities that arise, it is likely that a large slice of the money from Macquarie will be spent on developing LFC's underwriting agency, LFC Shield, which was known as RS Hayworth. Bought in April last year, LFC has moved the agency into an office around the corner from its Woodham Ferrers headquarters and has replaced its outdated computer system. Managed by Clayton's brother, Simon, LFC wants to double its broker client base from 200 to 400 and GWP from £4m to £8m: it has some surprisingly large brokers on its books already. The majority of LFC Shield's risks are placed with Sterling, making LFC one of the insurer’s most important customers. Clayton says: "Sterling is cautious and prefers the classic stuff. For example, it won’t write motor traders, construction or fish and chip shops. We have a Lloyd's capability for this." He adds: "We have installed a new online quote system, although half of the brokers still want the old-school way. We are writing risks mainly between £250 and £1,000 and pay a good rate of commission."

Acquisition strategy

Developing an appetite for this model, the brothers are now in talks with a £5m-plus underwriting agency in the South-East and see the potential to make several similar-sized acquisitions in this area. Clayton prefers to buy small and sees little worth in buying a broker with £10m-plus premium income. He says: “They would already have the best deals already. When we buy, we then try to source the best enhancements and rates possible.”

LFC has also invested money in creating an attractive website, which includes a section called ‘Benefi ts of using a broker’; Clayton feels strongly that this message has not been marketed suffi ciently to the public. He says: “As a fi rm, we have been dabbling in marketing but it has not been good enough. We have recently employed two telesales marketing companies and they have proved very successful; in the first three months, we have secured new business and are now hiring a specialist marketing person.”

However, Clayton has larger ambitions for the industry and wants every broker to commit 0.5% of its income to a sectorpromoting advertising pot. He comments: “We need to do more to market brokers; despite how crass the Aviva campaign has been, it has worked. Marketing does work.” He continues: “Brokers are lazy and need to put their money where their mouth is.” Aon has certainly set the benchmark in this area with its audacious sponsorship of Manchester United, which will cost the broker £20m a year for four years from the 2010-11 season. It remains to be seen how Aon proposes to articulate the importance of broking through such a bold move and how successful this approach will prove ultimately.

In addition to marketing, Clayton is equally passionate and upfront about insurer The PB Interview Jerry Clayton “We need to do more to market brokers...[they] need to put their money where their mouth is.”service. He has seen the good, the bad and the ugly but appears to have become used to the frustrations. Clayton thinks that there are some “bloody good people out there” but “too many weak links” and is adamant that offshoring claims and accounts “doesn’t work”. True to the ever-changing natures and philosophies of insurers’ offices, NIG has decided to shut its office in nearby Chelmsford as part of its decision to close eight sites, a significant change in strategy for the insurer. Clayton has his own philosophy: “We have to take it on the chin.”

Commenting on the ability of underwriters, he says: “There is less and less experience out there and very few can underwrite. Luckily, most companies have somebody at a reasonable level that we can talk to.”

Clayton has also been hurt by several large insurers reducing their commission levels at the beginning of the year, despite his firm providing well-above-average loss ratios. To the disbelief of several insurer account managers, Clayton is not afraid to swap business around and is talking to the likes of Ecclesiastical, Amlin, Travelers and Fortis. He is pragmatic, determined to protect his bottom line and, with so much choice and appetite for business, he is in a strong position.

Award-winning

LFC is keen to work in partnership and has developed an attractive offering in the risk management field for fleets. LFC Armada Plus is an exclusive agreement with the Institute of Advanced Motorists to fund driver assessments and online training for fleet clients: where highrisk drivers are identified, they are then recommended to complete a Drive and Survive on-road coaching course. The broker hopes that, as a result, fleet underwriting results for insurers will improve and Clayton’s firm subsequently hopes to make some money after the first year of policies is reached. Already, the service has been rolled out to more than 40 fleet managers and has won the Business Innovation of the Year award at May’s Essex Countrywide Business Awards.

The world has changed but the old adage ‘who dares wins’ is probably still true (Sir Fred Goodwin and Adam Applegarth are, unfortunately, prime examples of this motto). Where some banks now smell fear, others see opportunity; when some brokers panic, others stay calm. Clayton understands the difficulties of the times but is reluctant to stand still to be choked by bad news. Instead, he is challenging insurers, raising money and scrutinising balance sheets to see how he can best serve his business. He is a local boy who wants the best for his staff but, in difficult times, is not afraid to think about the bigger picture and grow his company through acquisition. 

LFC acquisitions to date

Anthony King & Clarke, Clarke Cleverley, David J Bishop, Graybrook, D S Insurance, FSW Insurance, Highclere, JB Partnership, Lessing Commercial, Mainstay, MKM, Pinhey Partnership, Richard J Beales, Roundhouse, RS Hayworth.