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Insider In Full: Howden: Four critical questions that determine the broker’s future

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Topics: Strategy

In Greek mythology, Hyperion – the namesake until last year of Howden Group Holdings – was a titan, father to the sun, the moon and the dawn...

Rachel Dalton

 

Now is a crucial moment for the broking group, which has expanded from its humble beginnings in 1994 to become a business backed by major private equity players and valued last year at $5bn.

But if the powerhouse independent intermediary wants to retain its place among the stars, it must ensure that it has future-proofed itself against key strategic risks around its shape, culture, ownership model and succession plan.

While the business’s growth over the past quarter of a century has been hugely impressive, the next phase of its growth story will bring new challenges and raises the prospect that Howden could be less like its former namesake Hyperion – and more like the unlucky Icarus.

The decisions the broker makes over the next few years will be decisive in whether or not it can deliver on its intention to be the chief challenger to the world’s largest intermediary companies.

The group’s trajectory has been impressive, particularly in the past decade, as it leapt from a valuation of just £250mn ($341mn) in 2013 and $2.5bn in 2017.

  

 

Two major deals account for a significant part of that growth: first the purchase of wholesaler RKH in 2015, which balanced out the group’s abilities in retail with wholesale, and then the £700mn acquisition of UK retail broker A-Plan last year.

These two transactions sit among a series of smaller M&A deals driven by CEO David Howden that has created a business bringing in around £1bn in revenues, employing more than 9,000 staff and controlling $12bn in premium.

The CEO has repeatedly stated his aim to become the natural alternative to the largest brokers in the market – both for talent and clients – in London market business as well as in Europe, Latin America, the Middle East and Asia-Pacific. With a series of overseas acquisitions under his belt, progress towards that goal has already been made.

However, for all its advantages and achievements, there are key questions to be answered about the group’s next moves.

We summarise those questions as follows:

Although talk of an IPO – once a staple of 2010s speculation – has quieted, the question remains: how much larger can Howden grow before private investment can no longer sustain it?

Howden’s impressive growth brings with it a set of challenges. For instance, how can Howden maintain its entrepreneurial culture and hands-on M&A approach as it reaches significant scale?

Howden has always set itself apart from its competitors with its focus on international retail business and lack of a US retail presence. Is this a sustainable, profitable model for the future – and can a broker of this shape really compete with US-heavy behemoths Marsh McLennan, Aon and Willis Towers Watson?

Eponymous chief Howden, currently aged 57, is credited to an unusual degree with the business’s success. What will Howden without Howden look like, and how has the business prepared itself for that future?

We discuss these key questions below, and gave CEO Howden right of response to those questions in a full accompanying interview, which can be found here.

The story so far

The broking side of the business is split between retail, specialty and reinsurance services.

On the underwriting side, Howden owns Dual, a $2bn gross written premium (GWP) international MGA. It also launched a data and analytics arm, HX, in 2018, and through that digital platform, $100mn of premium was transacted in 2020. That unit also houses a burgeoning capital markets consultancy, Howden Capital Markets, which launched last year.

In October last year, the company merged its retail and specialty businesses, previously known as Howden and RKH, into one unit led by Howden Broking CEO José Manuel González.

Howden currently has a natural advantage in an era of intense market consolidation, which has dislocated talent from the larger brokers. The company has already made hay with this, having hired 300 people from the now-combined Marsh McLennan-JLT entity, according to Howden himself.

The group’s aggressive approach to prising away disaffected talent from rivals is well documented and has resulted in legal action from both Marsh and Guy Carpenter.

Meanwhile, the long period of uncertainty created by Aon’s attempt to buy Willis Towers Watson, and the merger’s ultimate collapse, has also helped Howden hire from both businesses.

Strategically, the combination of Marsh McLennan with JLT has created a space in the market for a sizeable, independent and entrepreneurial broker.

This is a space that Howden is explicitly targeting, although it is not alone in that ambition. Ardonagh Specialty – following its acquisition of Corant – is also pushing to fill the gap.

AJ Gallagher, meanwhile, is now a major power on the reinsurance side following its agreement to buy Willis Re, and Lockton is also expanding and taking full advantage of disruption among the largest intermediaries. The field is not clear for Howden to enter challenge-free.

The ownership question

Since its relatively modest launch in 1994, Howden Group – renamed Hyperion in 1998 and then restored to its former moniker last year – has attracted successively larger backers and built up the business through extensive M&A.

At the same time, it has maintained a degree of autonomy through a staff/management ownership structure that is an unusual selling point for talent.

  

 

Following its latest transaction, Howden is now 35% owned by staff, with 20% held by new investor Hg and 45% by previous investors General Atlantic and CDPQ.

As the business grew to significant scale, so too did speculation about the group’s future ownership model, and by mid-2010s, the market came to anticipate an IPO.

This was fuelled in large part by CEO Howden’s multiple assertions – in 2011 and 2014, for instance – that the natural home for the business, ultimately, would be the public markets.

The major benefit an IPO would confer on the group would be permanency of capital, which would allow the business to trade without the disruption caused by courting new investors every three or five years to keep on growing.

An IPO also provides an event in which investors can take money off the table, and it allows companies to raise additional capital through public shares, along with a high degree of publicity and gravitas.

There is a school of thought that once companies reach a certain size, private markets can no longer sufficiently fund their continued development.

There would, however, be a number of drawbacks to a Howden IPO.

To begin with, a flotation would come with the usual baggage, including greater scrutiny and the need to publish quarterly accounts, increased regulatory interest, the need to satisfy short-term investors, and a reduced ability to borrow due to public markets’ lower tolerance of debt.

Further, the natural cap on the size of a privately backed business has lifted in recent years as bankers become more ingenious at sourcing private capital for larger businesses.

Examples of privately held brokers that are larger than Howden, for instance, include Hub International and USI.

Having secured its latest private equity partner at an enterprise value of $5bn, it may no longer be a question of when Howden needs to launch an IPO, but if it needs to do so at all.

In an interview published alongside this analysis, CEO Howden said the company has turned its focus away from an IPO.

“There is a massive shift away from public companies to private and you’re seeing that in all sorts of industries,” he said, adding that the private capital markets have expanded to such an extent that Howden can continue to grow within them.

He added: “How can you be fully people-first if you are a public company and you have a duty to the shareholders?”

However, even if Howden can remain privately owned and achieve the scale it intends to, its ownership structure now, although in some ways a selling point for staff, is relatively complex.

How can you be fully people-first if you are a public company and you have a duty to the shareholders?

With three private equity backers sitting alongside a large staff ownership element, there is additional scope for differences of opinion on the strategic direction the business should take. Balancing the potentially competing desires of these groups will be essential in the next few years.

On the current ownership structure, Howden said: “We have a unique capital model and have always been very deliberate in working with long-term capital over the years that understand and support our strategy.

“Our investors are aligned and are long-term; Hg joined this year, and GA, having been in for eight years already, and CDPQ, having been in for four, have committed to a further seven years.”

Howden added that the business’s backers have also signed a clause that prevents the company from being sold to a strategic rival.

“The three-to-five-year cycle is not good for them or us and so the model is evolving, with capital partners investing for the long term behind the vision and ambition for the company,” he said.

 

Continuing M&A at scale

Sources have in the past described Howden’s M&A approach as a thoughtful one – with each acquisition representing a considered move from all angles, including the financials, leadership and culture.

Partly this approach was made possible by having fairly flexible capital behind Howden. It is understood that during its ownership by BP Marsh, Howden made a number of acquisitions without strict targets around multiple arbitrage that private backers normally demand.

Howden is now part-owned by a group of three powerful private backers, having brought in General Atlantic in 2011 and CDPQ in 2017 before Hg last year.

It will be more difficult to continue to grow at a pace similar to that of the past considering Howden’s scale now – and having a group of such sophisticated backers may increase pressure for faster and more efficient M&A execution to maintain that pace.

  

 

One source, for instance, described Howden as a “shark” that “needs to move forward” in delivering growth “at all costs”, following the costs it has laid out on prior acquisitions, particularly A-Plan.

The business will have to work hard to continue to source and acquire targets that fit with its strategy and culture while avoiding any sluggishness creeping into the M&A process.

Howden said: “M&A has always been critical to our success.

“However, we’ve not executed on that many deals over the years – approximately 100 over 27 years. We always buy companies off market, both for larger strategic M&A, e.g. A-Plan and Align, and for smaller bolt-on M&A where we invest in talent and expertise.

“Companies want to join us because the management team want to grow and need investment to take their business to the next level. We are patient and wait for the right company that is culturally aligned. Our strategy won’t change in this regard, and we have the fire power to execute on bigger deals.”

The culture question

 

The Roman Empire problem: Controlling culture from the centre

Howden has throughout its history so far traded on its reputation for independence, entrepreneurialism and individually tailored client service, with much of that ethos tied to David Howden himself and his top team.

The business passed the £1bn-revenue mark in 2020. To give an idea of its scale, that makes Howden around a tenth of the size of Willis and Aon and 17 times smaller than Marsh McLennan, according to 2020 revenue figures.

As Howden crosses that threshold and approaches the big leagues, with still plenty of room to grow, can it sustain that reputation, culture and strategy across such a broad operation?

The staff ownership model in a business of this size provides a strong incentive for firms to sell into Howden and buy into its culture, as well as fostering strong loyalty from staff.

One mitigating factor in the challenge of maintaining the culture of entrepreneurialism will be the tactic Howden employs in striking M&A deals – which is to bring owner/founders along as part of the package, in turn helping to ensure client and staff continuity and lessening the probability of culture clashes later on.

Maintaining culture is the single most important thing I do. The culture is real and we believe in it

In particular, sources highlighted the leaders of the Spanish and Israeli businesses that Howden has acquired in having continuing strong roles in the company’s strategic direction. Former RKH CEO Dominic Collins, who stayed with the group post-acquisition and remains chairman, is another example of this trend.

The business also has a track record of installing long-term leaders who share his vision: current Howden Insurance Brokers CEO Andy Bragoli, for instance, has been with the business since 1997 and fulfilled various senior roles across the company during that time.

Howden said: “Maintaining culture is the single most important thing I do. The culture is real and we believe in it – it’s as vibrant now as it ever as, but that doesn’t mean it doesn’t change and develop over time.”

He pointed out that 35% of the company is owned by a group of 1,700 employees, which “helps create the owners’ mindset”, and stated an ambition to grow the proportion of employees with stakes in the company to 30% of the staff.

“The over-arching culture of empowerment pervades throughout the organisation and attracts people who want to build a business for the long-term.

“We know if we try to change businesses fundamentally, people will leave, so we don’t take a cookie cutter approach, instead we empower businesses to make their own decisions.”

The geographical question: International vs US strategy

 

International reach

Howden has made a series of strategic acquisitions overseas as it looks to extend its reach outside of the UK and London market business. It has broking and underwriting operations in more than 45 countries, with further plans to push into Europe specifically, as well as boots on the ground in a variety of Latin American, Asia-Pacific and Middle Eastern locations.

  

 

The international presence is a key differentiator from other brokers in that it has created a highly diversified revenue stream in terms of geography. With no direct US retail presence, this sets Howden apart from its largest competitors – and some of its smaller rivals as well.

  

 

Howden’s £700mn acquisition of UK retailer A-Plan provides a counterweight to that portfolio, in terms of geographical and currency risk, as well as the ability to balance out the wholesale and specialty business with retail.

A-Plan also gives Howden a vehicle through which to continually expand its retail presence, offering the owners of smaller retail business an attractive option to sell up to.

The key challenge here, however, is that although international markets have wide headroom for growth given the underinsurance in many countries, the relative infancy of many of these regions may mean business is not as profitable as in more developed economies such as the US.

On that challenge, Howden said: “It has taken a long time and a lot of patience and hard work to build an international footprint; we think it will be very difficult for anyone else now to build distribution in the way we’ve done.

“The group has a presence in over 45 countries and all of them are leaders in their chosen fields, often with superb margins. Our international platform serves both local clients in their home markets and multinational clients, where we can leverage our geographical reach and deep product expertise.”

 

US presence

A further question is whether Howden can truly consider itself a real competitor to the biggest brokers if it does not offer multi-national clients services for its US operations.

In some respects, this is a reasonable criticism. Howden does not compete in US retail where its larger competitors, such as Marsh, Aon and Willis, dominate.

In part, it is widely understood that this is due to the dependency of the wholesale business, previously RKH, on a flow of US retail business and a desire not to compete with the wholesaler’s US retail clients.

Building a retail business in the US from scratch is also notoriously difficult, with JLT’s multiple attempts standing as an example.

However, it is also fair to say that Howden is focusing its strategy elsewhere, as it looks to compete through a comprehensive suite of services across international locations outside of the US – in other words, the business is simply a different shape to that of its larger rivals.

"The distribution channel is not as much of an issue as the quality of the solution"

Howden cited the broker’s network of partners in the US as a mitigating factor to the lack of a directly owned US retail business.

“We’ve built a large business in the US by working closely with local brokers who are trusted by their clients because they have a track record of getting it right.

“The distribution channel is not as much of an issue as the quality of the solution, and that’s where we have had tremendous success, in partnership with the local client experts.

“The US differs from most other countries where the market is only big enough for one relationship (a Howden office); conversely, the US is big enough to allow us to have multiple relationships.”

 

Eyes on Dual

Another key source of exposure to the North American market is Dual, which now writes $1bn in US premium.

The future of Dual and the approach to the underwriting side of the business in general is another key question facing the business, however.

After a period of difficulty in the early 2010s and a strategic overhaul in 2016, in which CUO Talbir Bains was promoted to CEO to tackle a number of operational issues, Dual has grown from strength to strength, reaching $1.2bn in GWP in 2020. Richard Clapham now leads Dual as CEO, after taking on the role in 2018.

The question ahead of Dual now is how to grow further, even considering its recent purchase of $630mn premium MGA Align, which created a vehicle writing $2bn in annual premium.

As this publication has reported extensively, carriers’ enthusiasm for the delegated authority market has contracted significantly as rising rates in the open market have led them to redeploy their capital where they can gain higher returns at lower cost.

Capital for delegated authority underwriting ebbs and flows through the pricing cycle and in this way affects all MGAs. To continue to grow successfully and manage this, then, Dual must be able to compete with rivals to secure strong relationships with paper providers as available capital expands and contracts more widely.

"Dual’s unique selling point is a combination of talented underwriters with expertise and specialisms that enable it to offer the products that ordinary carriers just can’t"

To do that, Dual must provide capacity providers with a compelling offer that withstands cycles of waxing and waning paper provision.

Howden said: “Dual’s unique selling point is a combination of talented underwriters with expertise and specialisms that enable it to offer the products that ordinary carriers just can’t.

“Its geographical and digital distribution across an international platform sees over 70% of its business transacted digitally in 16 countries.

“This digital distribution combined with deep local expertise provides something unique to capacity providers and therefore allows us to do more for our broker partners and clients. This is why the MGA model is so popular and why our paper providers want to stay on board.”

Howden also has the option of creating a vehicle that puts some of its own capital, capital from investors, or a mixture of both into underwriting – essentially bringing a balance sheet business into the Howden stable.

Dual has taken a step in this direction by putting its own capital behind Tamesis – which not only provides some security around underwriting capital going forward but also creates alignment with its other capacity providers.

Other MGA businesses have also made moves in this direction, most notably former Howden business CFC Underwriting, which has launched its own syndicate with backing from ILS and pension funds, as well as some of its own capital.

Lloyd’s is of course not the only option for such a vehicle, but a syndicate would provide the necessary licences and ratings in a relatively straightforward way.

This is an option open to Howden, and as this publication has reported, the group was exploring setting up a syndicate last autumn, having shelved similar plans in 2019 due to Lloyd’s ongoing remediation work.

Howden has also said publicly that the group intends to put some capital behind Dual.

In the interview with this publication also published today, the CEO confirmed that the business is “exploring how we raise capital directly from the capital markets...to create an opportunity for capital to directly back technical underwriting distribution”.

Howden added that he believes Dual could grow to $5bn in premium in the near future.

 

The succession question

Group CEO Howden has built up a reputation as the driving force of the company, often described as having boundless energy, relentless optimism, and a talent for winning over hearts and minds.

These qualities are all an essential part of the chief’s ability to strike important M&A deals, repeatedly attract suitable investment partners, and hire key staff from competitors.

Market sources also cited Howden’s forensic knowledge of both the group and market dynamics, always able to “ask the critical three or four questions that need to be asked”.

While the executive has made missteps in the past, such as an early purchase of a stake in reinsurance broker JK Buckenham that sources described as less than accretive, they credited him with having made “very few bad decisions” in a long career.

 

The future of Howden, without Howden

At 57, Howden is a relatively young CEO in a market where leaders regularly maintain their positions into their 70s.

However, the fact remains that in the next 20-25 years, the business will have to realistically continue without its charismatic leader at the helm – and having been such a big part of the group’s success and public image, one of the business’s key attributes ironically becomes one of its key risks.

How well the business preserves its culture and drives through its inevitable transition to a new CEO will be key to its continued success. There is a risk that staff could become disillusioned with a new leader or that the business could bring in a new CEO who does not manage the transition well.

Howden emphasised the business’s “bench strength” as an insulator against the collapse of its culture after his eventual retirement, which he says is the product of “home-grown talent” and recruitment.

“The company has a very credible management base to lead it on. People chose to stay with us, which means the company is not reliant on just one person to maintain the culture and leadership,” he said.

This is a tactic recognised by market sources, who noted Howden’s strategy of “surrounding himself with good people” as lieutenants to assist in driving the group’s overall strategy, including Howden Broking CEO González and chairman of Howden Broking Barnaby Rugge-Price.

 

A defining moment ahead

The success of the Howden group over its first 27 years of operation is undeniable.

The company boasts a unique ownership structure, a highly unusual international reach, and a culture of entrepreneurialism that is highly sought after by talent and clients alike.

But depending on the decisions Howden makes next about its growth pattern, backers and leadership, those elements could foster a unique set of hindrances in future. The strategic moves taken in the next few years, as Howden makes its transition into the big leagues, will be critical to the success of the next quarter-century.

An earlier version of this article incorrectly listed UIB as a larger privately held broker than Howden, and said that total employee count at Howden was 6,000. This has now been clarified.

 

Insurance Insider delivers global wholesale, specialty, and (re)insurance intelligence that enables you to act first. Redeem your complimentary 14-day trial for more premium content from Insurance Insider. 

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