Ardonagh arrives

Fresh from acquiring Resilium, the British group’s Ethos Broking is seeking out top performers for its new Australian broker network

By Terry McMullan

The number and calibre of the organisations seeking Australian insurance brokerages to add to their networks seems daunting to some, but not to British company Ardonagh, which has entered the local market with brisk confidence and a full head of steam.

London-based Ardonagh – the name is a combination of the Celtic words “on high” and “warrior” – is the UK’s largest independent insurance group and has already picked up major local authorised representative company Resilium. Then on June 1 it introduced its Ethos Broking operation into the Australian mix to build an entirely new broking business.

The arrival of Ethos has seen Resilium managing director Adrian Kitchin becoming Chief Executive of Ethos Broking, while Ben Hastie, formerly Resilium’s sales and distribution director, has become Managing Director of that company.

Ardonagh Australia Chairman Paul Lynam says Ethos already has a number of acquisitions in the pipeline.

The M&A drive is based on a simple “hub and spoke” strategy, allowing it to focus not just on larger established brokerages but also smaller up-and-comers and medium-sized operations working in the SME and mid-market sectors who are seeking ways to grow faster.

While the Ethos acquisition model isn’t all that different from other acquirers in the market – Mr Lynam says Ethos will take between 65% and 85% of a brokerage, usually with a five-year buyout – the wide embrace of the strategy gives him and Mr Kitchin considerable flexibility in the sort of brokers they target, the way they put their Australian network jigsaw together, and the way they develop it.

And he insists Ethos isn’t a “classic retail consolidator. We prefer to strike partnerships with strong broking businesses, maintaining their financial alignment and providing the resources and capital they need to accelerate their business plans and ambitions.”

Of course, building a significant new broker group in a highly competitive mergers and acquisitions market requires deep pockets, because the competition for high-performing brokerages is intense.

UK operators like Ardonagh are seeking opportunities in far-flung places like Australia because the environment to do so is right. Our regulatory and operations cultures are robust, which provides certainty. Add to that low interest rates, rising premiums and the fact that strategic outposts adds to their financial strength and flexibility.

And it’s happening in reverse, too. Australian brokers – most notably Steadfast and PSC – are building overseas networks for much the same reasons as the UK brokers like Ardonagh and Howden. Most recent was the April move by Steadfast to raise its stake in German-based broker group unisonSteadfast to 60%.

Its control of what is believed to be the largest global network of independent insurance brokers now gives it a reach that extends through key Asian centres, the UK, Europe and the US.

Locally, the competition for brokerages includes such players as AUB, PSC and Steadfast, let alone the internationals Gallagher, Aon and Marsh – the latter two of which have recently also gobbled up major global competitors in JLT and Willis.

Add to this mix the medium-sized Australian brokers also seeking out compatible businesses, and the task of putting together an entire network of high-quality brokers is challenging.

Building together: Paul Lynam, left, and Adrian Kitchin

But Mr Lynam isn’t deterred by the competition, pointing out that Ardonagh has a great deal of M&A experience, deep pockets and a plan that can make it a significant player, despite starting on the build much later than others.

Setting his sights: Mr Lynam says Ethos has targets in mind

He says there are still many potential targets in the local broker market, and Ethos “provides a point of difference for those brokers that haven’t already made a decision to sell to another brand. Our plan is not to replicate what the incumbents in the market are doing. Our offering is quite unique.”

Focusing on brokerages in the SME and mid-market sectors, he says he’s not aiming merely to bring together a string of small and medium-sized brokerages – although he doesn’t shy away from the mention of some big broking names.

“We’re not scared of big acquisitions,” he tells Insurance News. “We’ve got the firepower for big acquisitions, and the ability to do small acquisitions and everything in between.

“If they are a cultural fit, we’ll support them.”

While he and Mr Kitchin aren’t tasked with targeting the corporate market, Mr Lynam says Ethos is wellequipped through Ardonagh’s existing brokerages and its recent global acquisitions to give anyone a run for their money.

“But 99% of the customer base and [gross written premium] throughput of Ethos in Australia as well as the UK will be made up of an SME local community-focused customer base, which will be placed with local insurers,” he says.

“For middle market and corporate broking opportunities we’ll collaborate with our Ardonagh-owned sister companies in London who can access specialist insurance carriers.”

While he and Mr Kitchin are “looking for those good solid commercial businesses that have good community support”, Mr Lynam says the “hub and spoke” model allows Ethos Broking to accommodate brokerages large and small.

“We’re looking for brokers we can invest in, rather than focusing solely on companies with large portfolios.

“We don’t want to buy a ‘hub’ business where there’s no ambition, no drive, no inclination to grow. If it’s a big business where the owner says he or she doesn’t want to go forward in the business, then it’s a spoke.

“But you could have a broker of, say, 40, with a million dollars of revenue who has great ambition and drive, then fantastic; because we have the financial and technical support resources to build him out. That’s what drives the difference between a spoke and a hub.”

But who exactly is Ardonagh? Despite already being a significant player in the UK broker sector with a workforce of more than 7000 and recording a £251 million profit on income of £713.8 million last year, the Ardonagh brand isn’t familiar to local brokers. But it is moving very quickly to change that.

The Resilium acquisition in February was the group’s first significant foreign foray, but in April London-based Chief Executive David Ross announced the formation of a new division, Ardonagh Global Partners, and the acquisition of major American healthcare and benefits specialist AccuRisk Solutions, along with European and UK specialist broker Hemsley Wynne Furlonge.

Then on May 27 he revealed a $US500 million deal to buy BGC Partners, a global broker and financial technology group based in New York and London.

This includes London (re)insurance broker Ed and Lloyd’s broker Besso Insurance, aviation specialist Piiq Risk Partners, German marine broker Junge, UK-based agency Globe Underwriting, European agency Cooper Gay, and Sydney-based Epsilon Underwriting.

Its short history certainly reflects the speed and ferocity of global insurance M&A deals.

Ardonagh’s immediate ancestor is British specialist insurer Towergate, which was formed in 1997 and grew rapidly through acquisitions before hitting a brick wall of falling earnings and mounting debt last decade.

In 2015 Towergate was taken over by global investment company Highbridge, which sorted out the financial tangles and brought in Mr Ross – who was at the time chief executive of Gallagher’s international operations – to be the chief executive.

After selling off parts of the diverse Towergate business, Irish-born Mr Ross formed a new broking group in 2017 and rebranded it as Ardonagh.

The arrival of Ardonagh and Ethos Broking in Australia also reveals the value and importance of personal relationships in the insurance industry.

While at Gallagher, Mr Ross – who incidentally spent his university gap year in Australia – was also a key player in Gallagher’s 2012 acquisition of SRS, which was at the time Australia’s largest Lloyd’s underwriting agency. SRS had been founded and built by Mr Lynam, and he and Mr Ross negotiated the acquisition deal.

After leaving Gallagher, Mr Lynam was until recently chairman of Sydney-based Lloyd’s underwriting agency Epsilon, which is now part of the Ardonagh empire. Epsilon’s Chief Underwriting Officer Paul O’Leary was a longtime colleague of Mr Lynam’s at SRS.

When Mr Ross announced the BGC acquisition, he also noted “unprecedented levels of consolidation” in broking that have “created a vacuum in the market”, He says he wants Ardonagh to be “a pre-eminent force, restoring balance and cultivating a preferred destination for top-performing talent”.

It’s those “top-performing” brokers that Mr Lynam says Ethos Broking is also seeking in the Australian broking market. “It’s not all about how big a business is,” he tells Insurance News. “It’s their energy and their drive that we’re interested in.”

And while Ardonagh may seem to have arrived late to the local M&A party, he says there are still “plenty of brokers every day who are considering selling. They’re getting older, or their circumstances might have changed, they might want to extinguish debt. There are so many reasons for thinking about the best future course.

“Post-COVID, they may well have reassessed where they are in life. The business isn’t getting any easier, and some will be feeling they don’t want to risk the immediate future. Do they take some cash off the table now, or do they push forward and build up? “If they’re thinking about ways they can grow, we can expand and accelerate the opportunities. They don’t have to wait or take risks on their own – they can do it now.

“We’ve spoken to some [brokers] who are at an age where they have to make a decision now which could make the difference between a good retirement and a great retirement.

“They could well be thinking, okay, I’m going to focus for the next five years on building up this business before I retire to ensure I get the best possible price.

“I’ll get two cheques: one when I sell a majority stake – somewhere between 65% and 85% of my business – and I’m going to work hard for five years building my business in partnership with Ethos and its support structures. And at the end of that time I’ll get a second cheque.

“Growth and personal satisfaction comes from being able to achieve your dreams, not just thinking and hoping about them,” Mr Lynam tells Insurance News. “That’s in a nutshell what Ethos is offering.” 0

Experienced operator: Mr Kitchin knows the Australian broking landscape

The key person to build Ethos Broking

Ardonagh Australia is the third owner of Resilium in just 10 years. In December 2015 AMP sold its general insurance distribution arm to Suncorp, completing its withdrawal from the sector.

Armed with 700 experienced former agents, Suncorp dropped the AMP title and rebranded it Resilium.

Adrian Kitchin joined Resilium as managing director in August 2015 after nine years at rival AR group Insurance Advisernet – the last three as managing director.

In March 2019 he successfully executed a management buyout from Suncorp. The deal became legally messy – see the Insurance News archives for details – but had been resolved when Ardonagh came calling earlier this year.

Ardonagh Australia Chairman Paul Lynam says Mr Kitchin’s knowledge of the broking sector and its opportunities are key for Ethos Broking’s acquisition strategy.

“It’s going to be a very exciting time for me and Paul and [new Resilium Chief Executive] Ben Hastie and others in the management team,” Mr Kitchin tells Insurance News.

“I think Ethos is going to provide a real viable option for people in the market to make a choice about selling their business.

“The relationships we have with many brokers are proving to be very valuable in showing us where we really can make a difference under the Ethos and Resilium Partners brands.”

Ethos Broking has arrived in a period that Mr Kitchin describes as very challenging, with plenty of change looming for brokers.

“The change has been coming for some time,” he tells Insurance News. “A lot of people remain focused on the recent Hayne royal commission, but the reality is the change has been coming for professional brokers for some time before that.

“Brokers need to not just add value to their customers, but to demonstrate that they’re acting in their customers’ best interests.”

He gives the example of many brokers’ preference to provide only general advice. “In the medium to long term anyone sticking their heads in the sand and hiding behind general advice warnings are going to find themselves on the outer.

“Those brokers which have been focusing on giving personal advice, understanding their clients and providing relevant advice are showing the way things are going.

“We’ve adopted the personal advice model at Resilium. Our brokers are now very much across it, and we’ve noticed our competitors are playing a lot of catch-up to get to that place.”

The COVID-related lockdowns have also demonstrated the need to stay close to clients and provide reliable and ongoing advice.

“I think there have always been some in the market that have not had the level of contact with their clients that we in our business would deem is necessary. At Resilium we assisted all our brokers with all sorts of resources to help them talk to their clients about the difficulties they might face.

“We saw it as an ideal opportunity for our people to shine. While we’re hopefully through the worst of the lockdowns, I think staying close to your clients is now more important than ever.”

While he believes the focus on so-called conflicted remuneration is overblown and many of the arguments simply wrong – “commissions are so similar in level they create no conflict in the recommendations [brokers] make” – he looks forward to a moderation of the present hard market.

“I don’t see pricing going down anytime soon, but I think we will see a moderation in terms of increases,” he says. “For me the hardness in the market is in the area of insurer risk acceptance; that’s an area where brokers are going to have to work hard. We’re seeing risks that even two years ago wouldn’t have been considered terribly unusual becoming much harder to place.

“As for harder to place risks, there are certainly difficulties here and also overseas in getting some of those risks away.

“While pricing may moderate, the willingness of insurers to take on less than vanilla risks is going to remain an issue for some time.

“But as we all know, as underwriting profits start to return we will see capital return to the insurance space. It’s at that point that we may start to see some changes in pricing, but certainly not in the next 12 months.”