Growth Business: Towergate: the art of smart buying

Wednesday 12th July 2006

Towergate: the art of smart buying

in partnership with Ernst & Young

When Peter Cullum and his colleagues first sat around his kitchen table in 1997 to plan the creation of Towergate, they were clear from the outset that acquisition was central to the strategy. What has been remarkable is the speed and intensity of the ambition and execution.

‘We started with a plain sheet of paper,’ Cullum recalls. ‘We thought that we should shoot for a £100 million premium and a £10 million profit and that we could have an enterprise worth up to £140 million in five years. We were clear about what we wanted to achieve, as we had a lot of market knowledge. We took our acquired market knowledge and then identified not just niches, but crevices – they were so small.’

Cullum and his colleagues saw that a classic marketing approach, with its emphasis on focus and product specialisation, could be applied to the non-life insurance market.

‘The received wisdom in the industry was that it had to be commoditised and sold in packaged lots,’ he says. ‘Underwriting for the majority of classes could be done by computers; so long as the data was accurate and available, it was a straightforward process.’

Insurers often outsource their underwriting to specialists with necessary detailed knowledge of very particular sectors (such as caravan parks or golf clubs). For one thing, a caravan park owner isn’t a big enough enterprise to be an attractive customer for a large insurer; and, second, specialist knowledge is required to underwrite a caravan park successfully. These underwriting agencies tend to be small, privately owned businesses, working in isolation. Cullum perceived that the insurers had undervalued these agencies and that a rapid acquisition programme could achieve critical mass in a hitherto fragmented market.

So he sought out these agencies and bought them – by the barrel-load. He has acquired more than 50 in eight years.

It was one thing to buy them; it has been quite another to integrate them in order to gain the benefits of the scale that this rapid acquisition programme generated. In one respect, he was fortunate, as he was creating the corporate culture from scratch rather than having to marry two different cultures. His philosophy was to respect the individual knowledge of the underwriting staff and not impose an overweening management structure on top of them. All the advantages he gained by being fast in his acquisition strategy would be lost if the people working in the newly acquired businesses then felt constrained by committees or uncertainty about their ability to respond and act with authority. Towergate’s ‘head office’ has to be as small as possible.

In 2002 Cullum started to repeat the formula. He saw that the insurance broker market was fragmenting as a number of external factors combined. Insurers were moving to other forms of distribution channel, significantly by going direct or using the internet. Increased regulation of the sector, initially voluntary and then made mandatory by the Financial Services Authority, meanwhile, was introducing complexity and compliance burdens. And there was the fact that many broker principals were over 55.

For these reasons, many commentators had pronounced insurance broking a dying sector. In Cullum’s view, however, the brokers remained a very powerful presence. Roughly two-thirds of commercial insurance lines were maintained by brokers, as were virtually half of personal insurance lines. Brokers, he reasoned, had survived considerable attacks over the past 20 years and still retained loyal customers who valued their advice, interpretation and personal contact. Here, too, was another market ripe for acquisition.