M&A: Brokers seek to diversify and offset hard times

Companies are hoping to smooth out economic fluctuations, writes Paul J Davies

The average investment banker would not take kindly to being compared with a commercial insurance broker, and nowadays the broker would recoil at being lumped in with the banker.

But it is a simile often drawn by insurance companies, particularly when brokers are trying to squeeze more commission out of them rather than charging higher fees to the corporate clients they serve.

The primary purpose of both investment banks and brokers is to link companies with the capital they need to run their businesses. The big difference is that bankers deliver the capital today and the client pays fees and interest over time, while the broker organises capital that will appear if certain events occur, so long as the client keeps paying for it up front.

The other big difference, insurance executives often complain, is that while investment banks charge astronomical fees, brokers compete each other into the ground with low fees for clients and claw back the difference from insurance companies in the form of commissions.

Most brokers still reap the majority of their revenues from commission payments, leaving them exposed to the cyclical nature of insurance. The volume of premiums, and thus commissions, is driven by insurance pricing cycles and by the demand effects of economic ups and downs.

This is the single most important reason why brokers, especially the big three of Marsh, Aon and Willis, have spent the past decade or so growing through acquisition, not only in their immediate realm, but increasingly in other areas such as employee benefits, management consulting, human resources, capital markets, and mergers and acquisitions.

“We’re trying to build a model that is resistant to the economic and insurance cycle,” says Joe McSweeny, president of Marsh’s US and Canada division. “We have a strategic group to try and bring together those opportunities for our clients.”

Drew Fellowes, UK head of insurance at KPMG, says commercial brokers are trying to become embedded as corporate advisers on risk and employee benefits including pensions.

He says: “The potential benefits available are not limited to cost synergies but also revenue synergies, with commercial brokers focusing on improving new client acquisition and, ultimately, the extension of services provided to these corporates.”

One of the obstacles brokers faced in charging higher fees to clients is that they dealt historically with an insurance buyer who was not let anywhere near the boardroom. An investment banker deals exclusively with the so-called “c-suite” of senior executives.

But Mr McSweeny and others say this has changed since the crisis, which did more than anything else to elevate risk management matters to the boardroom. However, Peter den Dekker, president of Ferma, the European risk managers association, says there is still much work to be done.

He says: “Brokers need to develop more contacts within a company and to speak the language of the chief finance officer. They have to move away from providing just policies to providing capital and risk management, M&A ideas and advisory services.”

Others are doubtful that the approach of trying to create a one-stop shop for a range of corporate services can work.

John Hurrell, chairman of Airmic, the UK risk managers body, says: “When it comes to buying decisions, these are separate services bought by different people, so they are not seen as an integrated purchase.”

Carl Beardmore, chief executive of BMS, a smaller broker, says clients do not want to be overly reliant on one company. “None of us wants all our eggs in one basket,” he says.

“Clients are telling to us they want other valid competitors because they are becoming uncomfortable with the efforts to keep pushing other things towards them.”

But the brokers are also trying to break new ground in their traditional businesses. Mr McSweeney says that in mature economies, such as the US, Marsh is looking to the middle market, companies outside the Fortune 1,000 but which nevertheless are finding themselves exposed to complex global risks through their supply chains or distribution.

“One global corporate client is still worth many smaller ones, but [the mid-market] is a very large market and there’s plenty of business to be had,” he says.

Others such as JLT, the UK listed broker, are concentrating on specialisms in mature economies – in JLT’s case, construction, oil and gas, and aviation.

Meanwhile, all brokers are looking to get into emerging markets, particularly those of Asia and Latin America, although the former is proving tricky because there are not established local forces that would allow the big brokers to simply buy their way in.

But Julian James, chief executive of Lockton, another smaller London-based broker, says that brokers also need to consider new risks, for example nano­technology or more frequent earthquakes.

“We need to respond to these new risks, developing products and working with clients to understand how they can respond,” he says.

“For the industry, the biggest challenge is attracting the intellectual capital, getting our share of the talent coming into the markets.”

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