Top 50 Insurance Brokers. Analysis and Comparison of the US and UK August 2004

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1 Top 50 Insurance Brokers Analysis and Comparison of the US and UK August 2004

2 Executive Summary The US Top 50 is only 2.3 times larger than the UK equivalent. Given the difference in the sizes of the respective economies this demonstrates the importance of foreign earnings for indigenous UK broking companies. Whilst the Top 50 for both countries has grown in 2003, the US rate of growth was double that of the UK. The US market is significantly more concentrated than the UK. The difference in the level of concentration is widening and not narrowing as one might expect. Looking forward, we expect this difference to widen further IMAS Corporate Advisors Ltd This report may not be reproduced either in whole or in part without the prior written consent of IMAS Corporate Advisors Ltd ( IMAS ). Information and opinions contained herein have been compiled or arrived at by IMAS from sources that it believes to be reliable but IMAS does not accept any liability for any loss arising from the use hereof or makes any representations as to its accuracy or completeness

3 Introduction In the US the listing of Top 100 US brokers is compiled and published by Business Insurance and simply gives turnover and the change on the previous year s turnover. As with the UK, ranking is determined by absolute turnover. In the UK the listing of Top 50 brokers is compiled by us, IMAS Corporate Advisors, and published by Insurance Times. In addition to turnover, for each company a detailed analysis of the most recently published accounts is given, including such details as pre-tax profit, shareholders funds, highest paid director, number of employees etc. We also undertake a comprehensive review of market developments and highlight the important trends within the industry. See for the complete analysis. The following is a comparison of the US Top 50 versus the UK Top 50 brokers. As turnover figures are only available in the US we have restricted our analysis to this. Size of Markets It is often quoted that the US market is the biggest in the world, so it comes as no surprise to learn the respective brokerage figures for the Top 50: US UK $17.0bn 4.5bn Based on the 2003 year end exchange rate, the US Top 50 broker market was 2.3 times bigger than the UK market. Given the difference in the sizes of the respective economies this demonstrates the importance of foreign earnings for indigenous UK companies. Overall Growth The very significant increases seen in the UK market from 2001 to 2002 have clearly not been repeated in 2002 to However the slowdown is probably overstated as for a like for like comparison the weakening of the dollar ought to be reflected. UK US 2003/ % 11.0% 2002/ % Not available The US growth is largely accounted for in large part by acquisition driven growth, quite likely to be around 50% or more of the total

4 Concentration Table I shows the relative concentration of the Top US and UK brokers. Table I Top 50 Cumulative Revenue 100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% US UK Source: IMAS/Business Insurance A key observation of the figures shows the UK Top 50 are less concentrated than their US counterparts. Looking at the market share of the Top 5 in both markets demonstrates this: Share of Top 50 Market Top 5 US brokers 67% Top 5 UK brokers 54% It should be remembered that Marsh, Aon and Willis are in both the US and UK Top 5, with Arthur J Gallagher & Co. and Acordia making up the US Top 5, with JLT and Heath Lambert doing so for the UK. Continuing to Concentrate? The perceived wisdom is that the insurance broking markets are continuing to consolidate, with this process being particularly driven by the coming of regulation in the UK

5 For the UK, this belief is simply not borne out by the facts. Table II highlights the change in the shapes of the curves from year to year. The US line in Table II is the difference between the 2003 line in Table I and what it was in If the line is unchanged between the two years in Table I, then the line in Table II will be horizontal dissecting the vertical axis at 0.0%. If the Top 50 is consolidating, then the line starts top left, deconsolidating bottom left (the line always ends at 0.0% on the right for the whole Top 50 as Table II is looking at relative not absolute change). Table II 2003/2002 Cumulative Change 2.0% 1.0% 0.0% -1.0% % -3.0% -4.0% US Top 50 UK Top 50 Source: IMAS/Business Insurance For the UK the picture is clear with the larger brokers proportionately not growing as fast as the smaller brokers. This somewhat unexpected result is in fact a repeat of what happened in However, it is quite possible to explain the movement as a function of hardening markets in 2001 to 2002 and dollar movements in 2002 to 2003, i.e. as one-off events, not a long-term trend. The US picture is more complex. Their top five had pedestrian growth compared to the market. However, Brown & Brown (6 th ), HRH (7 th ) and BB&T (8 th ) have grown over 3 times as fast collectively as their larger competitors. Hence Table II shows the market is concentrating but it is driven by the comparative minnows of the industry; Brown & Brown is less than a 10 th of the size of Marsh McLennan (1 st )

6 Performance by Size Table III Average Growth Rates by Rank 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Top to to 50 US UK Source: IMAS/Business Insurance The statistics in Table III need to be treated with care. The average growth rate of two companies, one that doubles in size and one that halves, is 25%. In addition, if the one doubling in size is significantly smaller than the one halving, then average growth rate can be high while the actual market is contracting. The US category included two companies with growth rates of around 150%. The striking feature of this chart is the lacklustre performance of the UK Top 10. In the US stronger growth across the sector lifted their Top 10, but the far higher US figure was driven by the very strong performance of the second division (brokers 6 th to 10 th ). Below the Top 10, the US and UK markets have been performing broadly in line. Why is the US more concentrated, and getting more so On the face of it, one would expect the UK market to be more concentrated given that England (accounting for the vast bulk of UK brokerage) is increasingly viewed as a single market and the whole of the UK has a single regulatory regime. Contrast that to the US with fragmented state wide insurance regulation and enormous distances demonstrated by differing time zones

7 One clue is the differences in the importance of the quoted sector. Since the early 1990 s we have seen a host of quoted companies disappear from the London Stock Market: Bradstock, Fenchurch, C E Heath, Hogg Group, Lowndes Lambert, Nelson Hurst, Oriel, PWS, Sedgwick, SBJ. Lloyd Thompson prospers as JLT, Windsor survived and now prospers, Benfield and THB have joined the party but most of the other guests had already left by the back door. Our view is the lack of barriers to entry and the fact that the UK is one market with little local loyalty, has meant that most of the industry has been struggling to produce the rates of return required by fund managers. This has led to a sharp reduction in the size of the quoted sector and reduced the desire and capability for the quoted sector to act as the driver of consolidation, especially given low or even negative economies of scale. Conversely, in the US, the greater barriers to all out competition have sustained margins, allowing quoted brokers to make value enhancing acquisitions and issue paper to vendors thereby ensuring a mutuality of interest. In the US, many of the brokers are owned by broad financial services groups. In the UK, HSBC Insurance Brokers is the only example of this. (We remain sceptical about the much mooted convergence of insurance and wider capital markets as it is based on confusion between risk spreading and risk elimination). We expect the divergence of the US and UK market to continue until the UK quoted broker sector is revitalised. Given the continuing highly competitive market conditions for UK brokers, we do not expect the two markets to converge in the near future

8 IMAS Corporate Advisors Ltd o Founded in 1992, regulated by the FSA, we provide M&A and strategic advice o We are focused exclusively on the Insurance and Financial Services sector o The principals all have experience in working for major financial institutions o We have invested heavily in our own bespoke knowledge management system and this gives us an unparalleled depth of knowledge of our chosen sector Contact us: Oliver Laughton-Scott IMAS Corporate Advisors Ltd Bury Street London EC3A 5AT Benoit Guerin IMAS Corporate Advisors Ltd 5 King Street Leeds LS1 2HH Publications This paper has not been made generally available. Publications that are available via our website include: o IMAS/Insurance Times Top 50 Review (July 2004) o Top 200 UK Life & General Distributors Review (March 2004) - 7 -