The great insurance landgrab

The consumer insurance market has seen a fierce tussle for territory. Have the mega-firms won or has the war just begun?

Insurers sparked an epic land grab a few years ago when they began reducing their panels and putting the squeeze on fees. Meanwhile, added pressure was piling up on firms from regulatory change and the resulting threat of new entrants.

insurance consolidation

What ensued was a series of mergers and acquisitions among the legal market’s key consumer insurance players. To assesses whether this new category of super insurance firm has managed to dominate the market, particularly in light of the simultaneous emergence of ABS entrants, The Lawyer has carried out research.

A cursory glance at the market today shows how quickly the bulk of the work has fallen into the hands of a few key players. But does the fact these giants have gained ground mean the battle has been won and everyone else accept defeat?

While there is undoubtedly a story to be told about consolidation at a micro level, with regional firms joining forces or selling unprofitable books of personal injury (PI) work to emerging niche players, there is little public data available to make a fair analysis of that end of the market.

Instead, The Lawyer has taken a macro view, focusing solely on the major consumer insurance players in the UK Top 100 where the division of the market is most starkly apparent.

A look at the performance indicators of the major insurance players among the UK’s top 100 firms between 2009 and 2013 reveals a heyday for the consolidators and innovators such as DWF and Parabis.

Firms that have played a more conservative game may have maintained their share by growing turnover, but they tend to be locked in an unending battle to convert a decent proportion of that top line into profit.

Consolidate and contract

Key findings:

  • Turnover goes up across the board (except Pannone)
  • Fewer than half the number of firms are left at the end of the period

The Lawyer took a sample of 22 firms (see table, below) from its UK top 100 list that were active between 2009 and 2013. Twenty-one were active in 2009. By 2013, one of these had closed down, seven were legacy firms, and Russell Jones & Walker had become Slater & Gordon, leaving just 12 individual entities at the end of 2012/13. 

Since then that figure has shrunk further, with just 10 of the original sample still trading independently.

Of those that remained throughout the period, Clyde & Co experienced the biggest revenue growth between 2009 and 2013, with a 151.6 per cent increase in turnover, from £185m in 2009 to £336.6m in 2013.

In percentage terms the greatest revenue growth came from DWF, the most acquisitive of the sample, which added 213.6 per cent to its top line over five years, growing from a turnover of £60m to £188.2m and jumping from 52nd in 2009 to joint 20th position in The Lawyer’s UK 200 2013.

Pannone was the only firm in the sample to see revenue fall. It dropped by 13 per cent, or £6.9m, from £52.5m to £45.6m.

Morgan Cole’s revenue has flatlined, posting £33.5m in 2009 compared with £33.7m in 2013. The firm has since opted to sell its books of PI work to DAC Beachcroft and Berrymans Lace Mawer (BLM).

One firm, Halliwells, was an early casualty of the evolving legal services market. It collapsed in June 2010, with a reported turnover of £67m. That figure was down £16m on 2009, when the firm recorded a net profit of £11.8m, a 14.2 per cent profit margin.

Parts of the defunct firm were then acquired by several players, including Barlow Lyde & Gilbert (BLG) – which would merge with Clyde & Co shortly afterwards – as well as DWF, Hill Dickinson and Kennedys.

It is a move that has been mimicked in several pre-pack sell-offs since, which aimed to reallocate ailing firms’ assets as part of an orderly wind-up rather than have competitors picking the carcass the way they did with Halliwells.

Greenwoods merged with Plexus Law, a subsidiary of Parabis, in May 2013, creating a £90m firm (see The mergers, below).

The move was aimed at building Parabis’ reach into the Lloyd’s of London insurance market, with Greenwoods adding expertise in catastrophic loss claims, pure insurance, major property damage and construction liability claims.

Less than six months later it became apparent that a big Greenwoods client, Aviva, was uncomfortable continuing its relationship following the tie-up.

As a result 11 partners, supported by 23 legal specialists and 14 support staff, joined DWF’s catastrophic and large loss PI teams, creating a new office in Milton Keynes.

According to insiders at the time, Aviva’s concerns were clear during the merger talks, with the insurance giant stating it was uncomfortable that Greenwoods would be acting for other insurers.

sample1

 

sample2

 

mergers

Share of the market

Key findings:

  • Consolidation starts to pick out the dominant players
  • Market share remains similar at the top of the table, but Clyde & Co pulls away from the pack after BLG merger

Consolidation is the hallmark trend of the consumer insurance market over the past five years. To track the way market share has changed between 2009 and 2013, we removed the incomplete data for Halliwells and Greenwoods and looked at the remaining 19 firms.

In 2009 the combined value of the 19-firm sample was £1.3bn. Clydes took the lion’s share, with its £185m turnover equating to 14.5 per cent of the total. Irwin Mitchell came a close second, with 12.4 per cent.

Five years later the top of the table looks similar. Over the period, the total value of the sample market grew from £1.3bn to £1.6bn. Clydes is still in pole position but its share has grown to just over a fifth (20.6 per cent), creating a far greater gap between it and the second best performing firm, Irwin Mitchell.

Irwin Mitchell, still in second place, occupies just 12.3 per cent of the sample market by 2013, showing the degree to which Clydes has pulled away. There were just 2.1 percentage points between the top two in 2009, compared with 8.3 percentage points in 2013.

In sterling terms that is a £136.4m difference, just £300,000 short of the combined value of volume specialist Parabis (£110.5m) and Fentons (£26.2m) in the same year.

Not only has Clydes stolen a march on the competition by 2013 but the gap between Irwin Mitchell and its nearest competitor is also far smaller than in 2009.

At the start of the period DAC Beachcroft legacy firm Beachcroft was in third position, with a turnover of £121m, 9.5 per cent of the total. In fourth and fifth places came BLG and Halliwells with, respectively, 6.8 per cent and 6.5 per cent of the market.

By 2013, however, Beachcroft has merged with Davies Arnold Cooper (13th in the table in 2009) to form DAC Beachcroft; BLG has been snapped up by Clydes; and Halliwells has collapsed, helping to reshape the top of the table.

Over the same period DWF began its spate of acquisitions, taking Biggart Baillie and Fishburns out of the picture and enabling it to launch into joint-third position in the table with DAC Beachcroft in 2013. The firm’s growth spurt has helped it to capture 11.5 per cent of the sample market and position it just £12m behind Irwin Mitchell.

With the ambitious UK arm of Australia-listed consumer firm Slater & Gordon (S&G) yet to start its acquisition programme in earnest at the end of the 2012/13, its share of the market in 2013 is a fraction less than legacy firm RJW’s in 2009, at 2.4 per cent.

S&G has subsequently merged with Fentons and Pannone. Had those deals gone live before the end of the 2012/13 financial year, S&G would have had 6.8 per cent of the market and a turnover of £111.5m, just pipping Parabis to sixth position in the table with one percentage point more market share.

pannone

As it stands, Fentons and Pannone are both nestled at the bottom half of the table, with just 1.6 and 2.8 per cent of the market respectively. If you remove them it is notable that Morgan Cole finds itself at the bottom again, just below Keoghs.

Excluding those that ceased trading or merged, Pannone is the only firm that recorded lower turnover in 2013 than in 2009. All 13 of the rest recorded some growth over the period, albeit marginal in some cases and not necessarily uninterrupted year-on-year.

Pannone’s revenue figures clearly portray the pressures that led it to be acquired by S&G earlier this year (see infograph, right). While profits were squeezed across the board, Pannone is the only firm with turnover figures that gradually decrease over the five-year period alongside dwindling profits – although its profit recovered a little in 2013.

In 2009 the firm sat just behind DWF, with income of £52m compared to the latter’s £60m, but the following year that figure dropped to £49.5m and it continued to fall at an average rate of 2.6 per cent each year to hit £45.6m in 2013.

Meanwhile, Pannone’s profit margin has fluctuated but ultimately fell from 16.8 per cent in 2009 to 15.6 per cent in 2013, a 1.2 per cent drop. The firm’s lowest profit margin was in 2011 – at 14.3 per cent.

market share

Squeezed margins

Key findings:

  • Despite turnover going up, Parabis is the only firm to see a significant rise in profitability
  • The three firms with the most increased profits are consolidators

The Lawyer’s research reveals a significant disparity between revenue growth and profitability at the firms in the sample.

Parabis and DWF were the only two firms in the sample whose percentage increase in net profit outstripped the rise in turnover. Parabis saw net profit grow by 630.7 per cent between 2009 and 2013, with just a 50.1 per cent rise in turnover (see graph below).

squeezed margins

The firm’s profit margin at the beginning of the period was just 3.5 per cent, but has increased to 17.2 per cent five years later – no mean feat in a marketplace at the mercy of massive commercial pressure from clients, plus regulatory change.

Contrast Parabis’ performance with a traditional LLP and a longstanding presence in the market – Keoghs, for example, (although there are similar stories throughout the sample). Keoghs has doubled its turnover in five years – impressive on the surface, but the firm’s profit margin almost halved over the period, falling from 20.3 per cent to just 11 per cent.

With an ABS structure and multiple income streams, including defendant law firm Plexus, claimant firm Cogent, a rehabilitation provider and a health and safety consultancy, Parabis appears to be the only firm that has converted a growing top line into a healthy profit margin.

While the majority of firms in the sample saw turnover creep up, bottom lines across the board looked far less healthy. Five of the 13 firms in the 2013 sample recorded profit margins that are lower than in 2009.

Parabis is the only firm in the entire sample to see anything above a 2 per cent increase in profit margin. The only other growers were Fentons and DWF, by 1.6 and 0.3 percentage points respectively. Every other firm’s profit margin decreased, regardless of rises in revenue.

Minster consistently has the lowest profit margin of the sample, never recording a margin above 2.1 per cent at any point in the five-year period. Then, in the firm’s final year of reporting and just before it was acquired by comparethemarket.com owner BGL Group, it made a £599,000 loss.

According to the firm’s final LLP filing, which is for the 14-month period to 30 June 2013 to bring it in line with BGL Group’s accounting period, the loss was the result of investment in preparation for the introduction of the Legal Aid, Sentencing and Punishment of Offenders Act (LASPO) on 1 April 2013.

Following the acquisition, the LLP filing states the firm’s “core financing requirements are now met through an intercompany loan with the BGL Group” and it “continues to review the most appropriate method of internal and external funding in consultation with the parent company”.

Minster’s 2013 loss aside, its profit margin throughout the period is small compared with the rest of the sample. The only comparable figure is in 2009, when Parabis recorded a 3.5 per cent margin – just 1.5 percentage points above Minster’s 2 per cent in the same year.

Parabis pulled away from Minster in 2010 with a £6.7m increase in net profit which took the firm’s profit margin up to 10.2 per cent compared with Minster’s 2.1 per cent.

Minster later told The Lawyer that within six months of joining BGL, it had won new business and clients such as National Accident Helpline, Towergate and A-Plan. It had also increased its multi-track and catastrophic business and opened a new office in London. However, any direct comparison of returns will be hard to measure as the Minster brand does not report separately from the group.

Parabis is undoubtedly the top performer when it comes to increasing its profit margin over the period. The firm recorded a net profit of £16.4m in 2013 compared with £2.6m in 2009.

That equates to a 13.7 per cent increase in margin, from 3.5 per cent in 2009 – just 1.4 per cent greater than Minster’s best – to 17.2 per cent in 2013.

Kennedys and BLM saw similar margins in 2013, with the former reporting 18.8 per cent and the latter 16.4 per cent, but neither of these figures is an improvement on 2009. In fact, both firms’ profit margins decreased between 2009 and 2013. Kennedys’ fell by 2 percentage points from 20.8 and BLM’s margin fell by 4.6 percentage points, from 21 per cent at the start of the five-year period.

S&G’s performance is down in 2013 compared with UK legacy firm RJW, with the firm’s net profit 36.4 per cent lower after the acquisition than in 2009. It remains to be seen how acquisitions such as Fentons and Pannone will affect its margins or if the overheads from such an acquisitive year will keep margins lower for a while to come.

Morgan Cole again stands out as performing particularly badly, with a 10.3 percentage point decrease between a 2009 margin of 23.3 per cent and 13 per cent in 2013.

Both Morgan Cole and Keoghs saw an improvement in the middle of the five-year period, when it looked like their margins were recovering, but they both dropped sharply again between 2012 and 2013.

Debt

Key findings:

  • All firms in the sample carry debt
  • Average debt at these firms is higher than the market average

Anecdotally, debt has always been presumed to be a significant feature of the consumer insurance market because of the long lead times on work-in-progress (WIP) that requires funding. The Lawyer looked at the debt levels for 10 firms in the sample between 2012 and 2013 (see table below).

debt

All 10 had net debt in both years, with six seeing that increase between 2012 and 2013. Only Fentons, Kennedys, Clydes and Pannone decreased their debt levels.

The total net debt across the 10 firms in 2012 was £163.7m, which increased by 9.5 per cent to £179.3m in 2013. The average debt of the firms in this sample works out at £16.4m for 2012 and £17.9m for 2013, significantly higher than the £5.4m and £5.3m average identified across the market generally by The Lawyer’s recent research into debt.

Fentons, whose net debt as reported in its LLP accounts includes loans and debts due to members, has the highest net debt as a percentage of turnover, at 39.7 per cent.

The firm with the lowest net debt as a proportion of turnover is Irwin Mitchell, at 8.9 per cent. However, it has subsequently secured £90m of flexible funding from three separate banks, taking its current borrowing as a proportion of income to 45 per cent.

The biggest increase is at Hill Dickinson, whose net debt is 14.7 per cent of turnover and increased by 44.8 per cent between 2012 and 2013 – a substantial rise considering it has made two capital calls from partners in the past 12 months.

DWF added 37.71 per cent to its net debt between 2012 and 2013, taking it from £9.8m to £13.4m, although it is still only 9.4 per cent of turnover.

Insurance firms in particular have moved to take debt out of overdrafts and into rolling debt facilities in the past 12 months. DAC Beachcroft and Irwin Mitchell, for example, secured rolling credit facilities, eliminating the risk of a sudden recall of the debt in full – unaffordable for firms with debt-funded WIP.

A year on from Jackson the uninitiated could be forgiven for thinking that PI reforms are solely responsible for the emergence of a slimline insurance law market, when in truth insurers began pushing for commoditisation several years before Jackson intervened. The result is a market that has been reshaped as well as reformed.

Caveats and methodology

The dataset for the five years of this study has been compiled primarily from The Lawyer UK 200 annual reports and to enable year-on-year comparison, gaps have been filled with figures from firms’ LLP accounts. It should be noted that UK 200 figures are gathered before the end of the financial year and sometimes differ slightly from those filed later.

The rapid consolidation in the market over the period throws up its own issues when trying to compare figures – measures become obsolete. In the case of Minster Law, its reporting dates changed and merger overheads can skew estimations of a firm following a merger or acquisition.

With that in mind, it is not proposed that the figures used in this analysis are exact. It is assumed that UK 200 and LLP figures are as close to representative of a firm’s performance as possible and the conclusions drawn, though based on estimated figures, should be a fair portrayal of firms’ relative positions.

In some cases financials are compared to those of the legacy firms to track year-on-year performance. For example, DAC Beachcroft’s 2013 figures are compared to the combined 2009 figures of legacy Beachcroft and Davies Arnold Cooper (DAC). This does not account for the overheads incurred as part of the merger, but with so many variables it is the simplest way.

In 2009 Beachcroft generated income of £121m and DAC generated £45m. As such, DAC Beachcroft’s 2009 turnover is considered to be £166m for the sake of comparisons.

Similarly, Slater & Gordon’s (S&G) 2013 figures are compared with those of legacy Russell Jones & Walker (RJW), which generated £34.7m in 2009.

It is also important to remember that many of S&G’s mergers were after April 2013 and therefore are not included in the firm’s 2013 figures but kept separate for the sake of fair comparison. So although Fentons and Pannone also became part of S&G, it was not until the first half of the 2013/14 financial year.

Greenwoods, which became part of Parabis in the first half of the 2013/14 financial year, was not an LLP and as such its figures are not publicly available. As a result, the firm has been left out of the tables, but this article doesexplain what the legacy firm contributed to two of the biggest players in the market – Parabis and DWF.

UK corporate and claims panels

AIG:

Berwin Leighton Paisner, Bond Dickinson, BTO, Chadbourne & Parke, Clyde & Co, CMS Cameron McKenna, DAC Beachcroft, DLA Piper, Freshfields Bruckhaus Deringer, Hill Dickinson, Holman Fenwick Willan, Kennedys, Linklaters, Mayer Brown, Mills & Reeve, Morrison & Foerster, Murphy & O’Rawe, Norton Rose Fulbright, Plexus, Robin Simon, RPC, Simmons & Simmons, Simpson & Marwick, Travers Smith, Weightmans

Allianz:

Berrymans Lace Mawer, DAC Beachcroft, DWF, Keoghs

Aviva:

Addleshaw Goddard,
Allen & Overy, Arthur Cox, Appleby, Ashurst, Berwin Leighton Paisner, Bonelli,
DLA Piper, Field Fisher Waterhouse, Garrigues,
Latham & Watkins, Linklaters, Matheson, Nabarro, Pinsent Masons, Proskauer Rose, Quinn Emanuel Urquhart & Sullivan, Slaughter and May
 

AXA:

Clifford Chance, Clyde & Co, DAC Beachcroft, Hogan Lovells, Linklaters, Norton Rose Fulbright, Pinsent Masons

Hiscox:

Arthur Cox, Beale’s, Berrymans Lace Mawer, Browne Jacobson, Clyde & Co, DWF Fishburns, Kennedys, Lake Legal, Pinsent Mason, Robin Simon, Ronan Daly Jermyn, RPC, Simpson & Marwick, Watson Burton

RSA:

Hogan Lovells, Pinsent Masons, RPC

Zurich:

Berrymans Lace Mawer, Clyde & Co, DAC Beachcroft, Keoghs, Weightmans

Five years from now…

Stuart Henderson, managing partner (PI division), Irwin Mitchell

There will be a small number of sophisticated PI firms that will dominate the market, a series of mid-range players that will be able to compete and some niche specialists who may survive. But the ones that do a bit of PI for cashflow as part of a general practice will have disappeared

Simon Gibson, managing partner, SGI Legal

There will be two tiers of successful PI business – the ones with lots of scale who will probably be responsible for the majority of the work – there are already five or six that seem likely to take this slice of the market – and then there will be the smaller, niche practices such as SGI Legal, which have some scale and expertise in the PI sector, and focus on revenue streams and business processes. If there are any high street firms with two or three partners doing PI in five years’ time, I’ll be very surprised.

Mike Brown, senior partner, BLM