Size matters: Lloyd’s brokers are in expansion mode
In May 2018, Lloyd’s brokers SSL Insurance Group and Endeavour Insurance Services entered into an agreement to merge the businesses. The deal will conclude with both companies being acquired by private investment firm JC Flowers & Co. (JCF).
The companies said at the time that the move was prompted by increased regulatory costs, which can be better borne by larger companies, and a sense that there could be a gap in the market for brokers able to occupy a middle tier.
“Looking at the landscape and the environment at Lloyd’s, and the London Market business, we had concerns about the scale of our business,” says Endeavour CEO David Lawrence explaining the merger rationale.
“All the regulatory environment there is continuing to increase, so the pressure is on and conditions for smaller independent firms are pretty tough these days,” Lawrence adds.
Established in 2003, SSL, a marine broker headquartered in London, serves clients in more than 80 countries. It has expertise in many other insurance classes including cash in transit, financial institution and political risk.
SSL increased turnover to £9.1 million ($12 million) in the 2016 financial year (ending March 2017) from £8.2 million ($10.8 million) in the same period a year ago, according to latest available Companies House data. The after-tax profit remained roughly unchanged at £1 million ($1.3 million).
Endeavour, which was founded in 1999, specialises in the placement of business produced by North American and European agents, handled under delegated authorities from its London office.
Endeavour recorded a turnover of £8.3 million ($11 million) in 2016, up from £6.8 million ($9 million) in 2015. The after-tax profit was £1.4 million ($1.8 million) in 2016 compared to an after-tax loss of £1.7 million ($2.2 million) in the previous year, according to Companies House data.
The merger deal is expected to lift the two companies to a different part of the market, giving it more leverage and offering better conditions to compete.
“There is a bit of a gap in the London wholesale platform at the moment,” Lawrence says.
“With the consolidation, we’ve seen the middle tier become the larger tier. The differential between the large and the small players has become more considerable. I am sure there is a bit of a space for that sort of middle tier,” he explains.
The middle tier independent broker space includes Tysers, which was also recently involved in an M&A deal.
M&A on the rise
Tysers has joined forces with US-based Integro Insurance Brokers, which acquired 100 percent of Hawkes Bay Holdings (HBH), the privately-owned principal parent company of Lloyd’s broker Tysers.
Tysers reported turnover of £52.8 million ($69.6 million), for 2016, up from £46.8 million ($61.8 million) in the previous year, according to Companies House data. The pre-tax profit dropped sharply to £564,000 ($744,500) from £7.1 million ($9.4 million) over the period, driven by losses on financial instruments.
Tysers continues to be larger than SSL and Endeavour after the merger, and Lawrence sees potential to grow the business further. The stakeholders of the combined entity believe that the business would benefit from additional scale and are seeking further acquisitions as well as organic growth.
“We’ve been able to jump up here by combining two businesses, but I think there is a great opportunity for future acquisitions as well,” Lawrence notes.
“Having access to the private investment from JCF we will be looking at future acquisitions,” he adds.
Lawrence believes that the business environment for Lloyd’s brokers is improving as underwriters are looking for rate increases. “It’s definitely not a hard market but there are more opportunities coming through,” he says.
The merger deal is expected to deliver synergies and growth opportunities as the businesses of Endeavour and SSL have little overlap.
“We do different lines of business,” Lawrence says. Endeavour does not offer its clients marine capabilities, which is set to change due as the broker can take advantage of SSR’s expertise. At the same time, SSR can now offer its marine clients products in the non-marine space.
In addition, the group may expand into new lines of business by acquiring teams and entities. “Where we can see that there is a good cultural fit and product lines can complement, we can broaden the scope,” Lawrence explains.
Endeavour specialises in the placement of delegated authority and open market business produced by North American agents, but this may change in the future.
“There are lots of other product lines and areas of expertise. We would be very keen to complement what we have now and look to expand that out,” Lawrence says.
SSL may be able to help to diversify Endeavour’s business regionally as it is less focused on North America.
“SSL has a much wider territorial base on business which we can hopefully assist with some property/casualty opportunities,” Lawrence says.
The deal will give Endeavour an opportunity to look at business in Europe, the Middle East and the Far East, while Endeavour can help SSL expand its North American offering.
An alternative strategy
While also seeking growth, RFIB is following a different strategy. It has, in the past years, created hubs in the Middle East, the Far East, in Singapore and in Africa to target business locally.
“Having a sensible international footprint in terms of being close to our clients, as well as being close to our markets, has been core to that strategy,” says RFIB CEO Steven Beard.
RFIB operates as an independent international insurance and reinsurance broker and reported a turnover of £43.8 million ($57.8 million) for 2017, up from £41 million ($54 million) in 2016, according to Companies House data. RFIB is looking to double in size over the next three-year window, Beard says.
In May 2018, CCP TopCo, the holding company of RFIB, revealed plans to double the broker’s revenues to £100 million ($132 million) in the next three years also through acquisitions, the addition of managing general agents (MGAs) and a captives businesses while rebranding the group to Risk Transfer Group (RTG).
RFIB has produced an after-tax loss of £1.5 million ($2 million) in 2017 after a loss of £2.1 million ($2.8 million) in the previous year as investments for future growth weighed on profitability, Beard explains, but he is convinced that the efforts will pay off.
“As a result of the business expansion, we think that the profitability will scale quite significantly because we have a certain level of fixed costs in the business in terms of operating technology, premises, in terms of the regulated environment that we operate in,” he says.
“Part of this growth plan not only fuels significant increases in revenues, it should also significantly increase our operating profits which we recognise is important to give us the firepower for investments in people and technology moving forward,” he adds.
Despite soft market conditions, RFIB has grown its business into Lloyd’s by 40 percent between 2015 and 2017. Beard believes that to continue to expand it is important to be present locally.
“In Singapore we see some business that may previously have come to London but through Singapore capital the Asian markets are now prepared to write that business,” Beard explains.
“This business could originate from London or the Middle East or from Africa or from that local Asian market. The Asian market can provide capacity and coverage at the right price,” he adds.
Some of the capability that used almost exclusively to reside in London has been relocated to the Singapore market, increasing the local expertise, Beard notes.
RFIB also wants to work across African countries such as Ghana and Nigeria out of its hub in South Africa. Beard sees an opportunity in the African market as larger, global brokers shun the continent, focusing instead on North America and the western world.
“We see that that the African market is typically underserved in terms of having expertise on the ground to understand wholesale,” Beard explains.
RFIB is working with insurance companies in the region to understand where they need to solve problems such as lack of capacity, or lack of understanding of products or underlying risks.
“That business can either come into the Lloyd’s company market or could end up in the Dubai or Singapore capacity,” Beard says.
RFIB is owned by private equity firm Calera Capital, whose executives believe that the market needs one or two large independent wholesalers. Beard explains the growth rationale, which should be driven primarily by organic expansion. He expects many of its competitors to grow via M&A, reducing the number of independent brokers.
“We watch with interest the development in the market but we still see strong demand from our clients,” Beard says.
As part of the expansion plan, RFIB wants to create an MGA vertical and a captive vertical, also through acquisitions.
In June 2018 MGA Limehouse Agencies, part of RTG, acquired Dublin-based specialist marine underwriting agency and Lloyd’s coverholder Corporate Underwriting (CUL).
For its expansion in the MGA and in captives RFIB wants initially to focus on Europe. In the MGA space Beard is targeting both marine and non-marine lines, while focusing on insurance rather than reinsurance.
Beard believes that the market needs more reinsurance opportunities and he wants to cater for this demand through a broader captives offering.
“We are a top 10 Lloyd’s reinsurance broker. We understand that market and can build tailored solutions for clients across captive management self-insurance, mutual and access in the reinsurance market where it’s efficiently priced,” he notes.
“We see our international footprint doubling in size over the next three years,” Beard concludes.