The Lawyer UK 200 preview: Insurance: Upstarts force pace of change

It was no coincidence that the largest domestic merger between two law firms happened in the insurance sector. This is a market that is drawing the profession into a new way of working and forcing the traditional firms to compete with new entrants on service delivery and price.

As little as two years ago, Clyde & Co’s £300m ­merger with Barlow Lyde & Gilbert (BLG) would have been unthinkable. Yet the management teams in these ­former rivals clearly foresaw mass change in the sector.

This change is being ­driven by savvy in-house counsel, who can see ­financial savings to be made from their service providers. Step forward the volume houses: Irwin Mitchell, Parabis Law and Minster Law.

The most significant change in The Lawyer’s UK 200 2011 list has been the entry of Parabis and Minster. Parabis, a 10-year-old firm established by former Berrymans Lace Mawer partner Tim Oliver, enters the rankings at position 41, with a £100m turnover.

Minster, the main supplier of legal services to ­personal lines broker BGL Group, posted a 2010-11 turnover of £80m, ranking it at number 40.

Both operate in the insurance market, both work on a corporate structure, and both have post-LSA ambitions. It is for this reason that neither can be judged on average profit per equity partner (PEP).

According to its Companies House filing for 2009-10, Parabis Law, which is the parent group of defendant firm Plexus and claimant firm Cogent, has only 11 LLP members, putting it just outside the top 10, and is structured as a limited ­company.

Managing partner Tim Oliver told The Lawyer in July: “We don’t measure PEP partly because of the nature of what we do; it’s not a matrix we see as ­relevant. What’s important is keeping the quality of ­people and delivering a ­service. PEP isn’t the right benchmark for measuring that.” (The Lawyer, 4 July).

As the firm’s estimated net profit for 2010-11 is £12.5m, a traditional law firm structure would have seen its 11 equity partners take home an average of £1.14m.

However, it is understood that a large chunk of the profit is ploughed back into the business, with the ­equity partners paid on a salary plus year-end bonus ­structure.

Winning tactics

Despite the eye-watering figures, after a decade of existence Parabis is still an upstart in the legal world. How, then, is it that the firm is at the centre of a revolution in the industry?

One senior insurance partner suggests: “Parabis and the other volume outfits are driving rates down to buy their places on the panel. They say to potential clients, ’look at us, big ­insurer A is taking a punt on us - why don’t you?’.”

It is a tactic that has worked for Parabis. The firm has grown through acquisitions, buying up competitor panel firms with a turnover of more than £5m to strengthen relationships with clients.

In January, it expanded its client portfolio for international insurer QBE while at the same time taking over competitor Everatt & Co, a long-term QBE panel adviser. The merger took just six weeks to complete and guaranteed Parabis a broader insurance portfolio.

Parallels can be drawn with Clydes’ tie-up with BLG or the Beachcroft-Davies Arnold Cooper (DAC) link.

Clydes is one of the best insurance performers of 2010-11, posting a 10.4 per cent rise in turnover from £192m to £212m. BLG grew at a faster rate, with turnover up 17.2 per cent from £81.5m to £95.5m.

In proposing to come together later this year the firms have taken out their competition to strengthen relationships with in-house counsel. Clydes will inherit a volume arm following BLG’s acquisition of Halliwells’ volume arm last year.

Speaking to The Lawyer earlier this month (8 Aug-ust), Clydes chief executive Peter Hasson said the ­merger was driven in part by the anticipated reduction in panel places for global insurers. “The insurance industry is consolidating suppliers on a global basis. The UK insurance industry is much more international. Our clients are saying, ’we’ve just opened in Canada - we want you there’,” he said.

Meanwhile, in the mid-tier insurance market, DAC is looking for strength in ­numbers. At the latest year-end, the firm’s turnover fell to £43m from £44.1m, while PEP continued a downward trend and stood at its lowest point in a decade after falling from £278,000 to £268,000. It has not been below this point since 2001-02, when it posted PEP of £200,000.

It is firms like these that are feeling the squeeze on profit margin and it is firms such as Beachcroft, which saw turnover creep upwards from £131m to £134m over the last financial year, that will be opportunistic in exploiting that squeeze.

Kennedys is another firm with a strong international network that continued to expand over the past ­financial year. The firm added two international bases, with an office opening in Miami (The Lawyer, 23 September 2010) and a merger with its Portugal-based associate office Almeida & Athayde to launch Kennedys Portugal in March (The Lawyer, 2 March).

Kennedys took the plunge into the volume market back in June 2008, acquiring Davies Lavery after it was told by in-house clients that a cradle-to-grave ­service was what was required. According to one partner: “In insurance that means do the low-margin RTA [road traffic accident] cases and we’ll reward you with the odd piece of big-ticket litigation.”
Kennedys senior partner Nick Thomas says it has been a “good year”, with turnover up 9.8 per cent from £88.2m to £96.8m.

This comes after two ­consecutive years of significant turnover growth, with the figure rising 30.7 per cent between 2007-08 and 2008-09, from £51.5m to £67.3m, then rising a ­further 31.1 per cent to £88.2m the following ­financial year.

Thomas says Kennedys has gone full circle in its investment cycle and is again ready to start pushing money into the firm. Yet it too is feeling the pressure on rates from in-house counsel on the one side and volume firms on the other.

Earlier this year, Plexus usurped Kennedys as the provider of personal injury claims work to Tesco, a mandate Kennedys had inherited as part of its ­acquisition of Halliwells’ Sheffield office last year. While the impact of the loss would have been keenly felt, one Kennedys insider says: “Clients have walked away before, they always come back. We’re not going to drop rates to get the business, it isn’t sustainable.”

Another player moving into a similar space as Kennedys is Irwin Mitchell. For the 2010-11 year, the firm posted a turnover of £171.8m, up 9.4 per cent from £157m a year earlier.
It is a firm that has always had a corporate practice, but was better known for its ­volume arm. In the past year it has sought to change that perception by going into the City and making some big-name acquisitions.

The hire of a four-­partner real estate team from SJ Berwinin September last year was intended to send a message to the City that the firm should not be ­dismissed as “a bunch of guys from Sheffield in ­short-sleeved shirts”, as one rival partner labelled it.

Wanting to reinforce that message, in April Irwin Mitchell announced its intention to establish a £50m war chest to fund acquisitions following the implementation of the LSA (The Lawyer, 25 April).

Again the firm will be looking to lead consolidation in the litigation market, broadening its range of services and treading on the toes of firms such as Kennedys.

Getting cosy with clients

Other volume firms in the market have been cosying up to clients, ensuring a stream of referrals are passed over. Take Minster Law. It is the prime supplier of legal services to BGL Group, the owner of major insurance brands such as Budget Insurance, Compare the Market (CTM) and niche motorcycle insurance broker Bennetts.

Chief executive Stuart Ramsey explains: “When their client calls us directly we handle the claim, or the client can contact the broker and they contact us. Budget Group Limited is one big client.”

The firm was established in 2005 as a limited company by chairman Adrian Christmas off the back of the acquisition of Yorkshire-based Corries Solicitors.

It works on an extremely low profit margin with a high-volume turnover, handling about 50,000 claims on an annual basis. Ramsay says: “Our fees are for what we earn for handling PI claims. Quite a few have LEI [legal expense insurance] policies.”

With net profit at an estimated £700,000 it is a long-term game that many traditional firms are reticent about. Nevertheless, it is not alone in this market. Since it made its debut in the UK 200 in 2008-09, Optima Legal has seen its turnover fall 23 per cent from £30m to £23.1m in 2010-11.

The firm found itself in hot water with watchdog Solicitors Regulation Authority (SRA) last summer when the regulator told it to sever links with outsourcing giant Capita after the SRA found their relationship breached rules governing non-lawyer investment in firms (The Lawyer, 9 August).

Optima was found to have set up an alternative business structure (ABS), with Capita providing a series of loans amounting to £35m. These were used to fund acquisitions, including the buyout of Dickinson Dees’ volume arm D3 Legal in November 2009.

The firm’s turnover might have shrunk in the past two years, but its rapid growth (from zero to £23.1m in the five years since it was ­established in 2006) reflects the inroads this batch of firms can make with the backing of a corporate ­entity.

There will, of course, be those firms operating in the insurance sector that will stay away from the volume end of the market.

One Ince & Co source says the firm considered an investment in the sector, but refrained because it wanted to stay focused on the premium work coming out of the insurance markets.

In the past year, turnover has flatlined at Ince, down marginally by 0.1 per cent from £86.3 to £86.2m. The firm sees opportunities spinning out of the Clydes-BLG merger, with what it sees as a major competitor being taken downmarket.

“You have to choose one way or another,” the source says. “It’s very difficult to stay premium when you’re looking to go down another route with one group doing volume and the other doing premium. Firms in this market need to distinguish themselves and Clydes has enabled Ince to do just that by taking over BLG.”

The insurance legal ­market is changing the way legal services are being delivered. This is a change that is being driven by the volume markets squeezing profit margins and forcing their peers to play a different game. Consolidation can only continue in this sector for a limited time before it starts to seep into other key legal areas.

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