The brokers survey


2009 & 2010 OPERATING PROFIT AS PERCENTAGE OF TURNOVER OPERATING PROFIT


35.0% Windsor 30.0% 25.0%


Towers Watson Lloyd & Partners


2010 2009


Size of sphere corresponds tothe operating profit £000


20.0%


RK Harrison


Cooper Gay 15.0% Hyperion 10.0%


Gallagher International (including Heath Lambert)


Swett & Crawford


5.0%


0.0% 0 50,000 100,000


with strong underlying profitability: operating profits as a percentage of revenue having increased to 23.8 percent from 16.5 percent, and from 12.8 percent to 15.1 percent respectively between 2009 and 2010. Also worth noting are the high operating profit percentages achieved by Windsor and Towers Watson—an indication, many investors will believe, of very efficient businesses with little wastage.


The overall trend on this graph is that the average profitability as a


percentage of turnover has marginally improved for the brokers from 10.6 percent in 2009 to 11.3 percent in 2010. This is likely due to increased economies of scale offset by declining investment returns. “Interest rates are low compared to historic levels, this has impacted results and some brokers have in recent years employed more risk-averse investment strategies,” Ross says. He also notes that the 10 larger brokers fared better in 2010 than the smaller 10.


This measure of success is also directly reflected in the operating


expense ratios of the brokers. It is little surprise that of the brokers that have reported their 2010 results, the three to achieve a ratio of under 80 percent are Lloyd & Partners (76 percent), Towers Watson (74 percent) and Windsor (70 percent).


58 | INTELLIGENT INSURER | September 2011 150,000 200,000 250,000 TURNOVER £000 None of the brokers have fared particularly well on the investment sides


of their businesses in recent years. In 2008 around three quarters of the brokers surveyed were achieving more than 3 percent of their revenues from investment income, with an average return of 4 percent.


Since then, however, matters have gotten worse. Triggered by a combination of low interest rates and a continuing flight to quality among asset managers, these returns plummeted in 2009 to an average of 1.3 percent and they fell again in 2010 to just 0.7 percent. In 2010, only four brokers managed to generate more than 1 percent of their income from investment returns: Gallagher International (1.9 percent), Towers Watson (1.1 percent), UIB Holdings (1 percent) and Windsor (1.6 percent).


These figures provide an interesting snapshot of the state of the London


Broker market, in terms of which players are benefitting from what has been an intense period of consolidation, which are most efficiently run and which are moving ahead of the pack in terms of size and breadth.


“Whilst many brokers must be looking forward to an end to the soft insurance market at some stage, the major trend is likely to continue to be consolidation, refocusing broking activities and an increased focus on operational efficiency,” says Ross.


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