David Ross, the insurance veteran hoping the battles are over

In the last two years insurance veteran David Ross has been swept into a high-profile lawsuit with his former employer, been forced to fit out his home with security cameras after allegedly being spied on and taken on a job which saw him in charge of a firm in complete turmoil.

“They had a quarter of the profit I had expected,” the 49-year-old Irishman recalls of Towergate when he joined as its chief executive in 2015. “I spent a year thinking how the hell do we get out of this mess.”

Fast-forward to today and Ross is hoping the bad times are behind him, or at least the really bad ones. His heated dispute with ex-employer Arthur J Gallagher – which alleged breach of contract over his exit, with Ross claiming they then hired a security company to spy on him – was settled, and Towergate has just been part of a transformational five-way merger. There are also fewer staff crying in the office.

“When I started, I spent 95pc of my time with weeping staff. Then 75pc, then 50pc. Now the weeping is gone,” he said, a month into his new role as the chief executive of The Ardonagh Group – the umbrella company created after Towergate and four other insurers were bought under one holding company last month.

The deal, which brings Towergate together with insurers Autonet, Chase Templeton, Ryan Direct and Price Forbes, puts Ross in charge of 5,000 staff and around £500m in annual revenues. It is behind thousands of insurance policies including more white vans than any insurer in the UK as well as one in three GP surgeries.

“The insurance industry has been on the bones of its ass but, unlike the banks, it has pulled itself together,” Ross said, hopeful of the enlarged firm’s future. “Investors said this was the last big private company of any size in the UK insurance industry. It might have been the worst house on the best street, but it was the last house available on that street.”

While things are looking up – Ross said he’d consider an initial public offering or sale of the enlarged group once it becomes a “monster” next year – things still went dramatically wrong at Towergate, which had to be rescued by its bondholders in 2015. Its mistakes serve as a warning to any deal hungry business.

“They were obsessed with acquisitions – to the uneducated it looked like a top story,” he recalls of the years before its rescue. “But when you stop buying, it catches up with you. They had a lot more people than needed because it was so incredibly inefficient.”

When Ross took over, the company had no less than 1,000 bank accounts – “it had bought 300 companies without worrying about integration,” he explains – and an IT system so nightmarish that the firm had a server for every four members of staff.

The eureka moment came when he asked a member of staff in the accounts team why she had a laminated card stuck to her screen with 60 different login details.

“She told me it could take her four hours to find where to deposit a £14 cheque,” he said. “That’s when I realised what was wrong with the company. What used to take four hours now takes three minutes.”

While the problems were plenty, Ross claims to relish a challenge – hence why he joined Towergate in the first place (though he admits he didn’t quite realise the extent of the mess). It would be no surprise if the public spat involving Gallagher made him even more determined.

But despite the stresses from the last few years, it was an experience from 30 years ago – when the HR director of an insurance company in Ireland called Ross unhireable – which really motivates him.

“He said look, I see a kid with no direction, and if I let you work here for free I’d be overpaying you,” Ross recalls, adding that when he was running a division some years later he got a boat back to Ireland and confronted him. “I don’t think you can ever forget what it’s like to be young, trying to find something. I resent that guy to this day.”

It was that experience that made him notice 23-year old Omar Bashir holding a cardboard sign advertising his skills at Cannon Street station three years ago.

“I thought how would I feel, if I was 19 or 20, holding up this piece of cardboard,” Ross remembers. “He was given just two business cards that day – one from me, and one from the Bank of England’s director of statistics.

“I ripped up the other business card and told him he got the job because anybody who’s going to stand in front of 100,000 people is hungry enough to work in this company. He’s been a rockstar ever since.”

With the stress of the last few years now largely over – “I was worrying my life away,” Ross admits – he wants his staff to stay humble as the business gets bigger, with nobody to behave like the HR director that knocked his confidence when he was an unemployed teenager.

“Everybody knows that person. When this company gets stronger, i’ll tell my staff not to forget that. Don’t abuse that position,” he said. “I told him [some years later] – you’re the reason I emigrated – I’m the youngest director in the history of this company, but you told me I was only fit for digging holes. I’m going to use you as an example of how a company looks when things go wrong.”


Age 48


East Sussex, on a farm with 80 pedigree cattle


Land Rover with the kids, two seater on the weekend


Farming, family, flying, fast cars


Franciscan College Gormanston

Insead Alumni

Big Break

Emigrating from Ireland to London to 1989


AIG Joins Other Insurers in Moving Away from Financial Forecasts

Brian Duperreault, the new chief executive officer of American International Group Inc., said the company will scale back the projections it provides to Wall Street after his predecessors were burned by goals that proved unattainable.

“Going forward, we will no longer be providing guidance on targets,” Duperreault said on a conference call Thursday discussing second-quarter results. “Financial targets are important in how we manage the company, but they have to be put in balance.”

Duperreault joins rivals including Travelers Cos. and Evan Greenberg of Chubb Ltd. in shying away from providing forecasts that have proved difficult to make because of fluctuations in weather and pricing trends. New York-based AIG’s results have been far more volatile than earnings at those competitors.

Ex-CEO Peter Hancock announced a 10 percent target for return on equity in late 2016 as part of his plan to assure investors including activist Carl Icahn that there was a path to boosting shareholder returns. By February, AIG set a new target for normalized ROE of 9.5 percent at the so-called core segment. In May, he was replaced by Duperreault.

AIG has a long history of providing investors with unpleasant surprises and had been increasing disclosure about some segments to boost transparency. A slide show for Thursday’s earnings call, AIG’s first under Duperreault, didn’t include a page that analysts including KBW Inc.’s Meyer Shields counted on in the past for information about property-and-casualty units.

‘Very Surprised’

“AIG still needs to address its persistent commercial P&C underperformance,” Shields said in a note to investors. “We’re very surprised at its omission from the presentation.”

Duperreault’s company slipped 0.5 percent to $65.55 at 11:59 a.m. in New York. The shares are little changed this year.

Another shift under Duperreault is that the company plans to pursue expansion, possibly through acquisitions. That contrasts with Hancock’s approach of selling assets to free up capital for share buybacks. The new CEO was vague about the pace of repurchases in the future, drawing repeated questions from analysts seeking data for their models on earnings-per-share projections.

“My priority is to take this capital and find ways where we can increase the franchise value of this company,” Duperreault said. “If we can’t, obviously we would return it. But that would be something I would prefer not to do if I can find something better to use it for.”

Greenberg remarked in 2013 about the frustration involved in making projections, after being told on a call that the targets often create confusion.

“Everyone here is cheering, because we’ve said that to ourselves,” Greenberg said that year. “My god, why are we doing guidance?”


Brokerage organic growth rebounds: Study

Insurance agencies and brokerages saw organic growth rebound to a median of 4.6% in the second quarter of 2017, advisory firm Reagan Consulting Inc. said in a report issued Thursday.

This is up from 3.9% in the first quarter of the year, which showed the weakest growth rate since 2011, Atlanta-based Reagan said in a statement.

The reversal was spurred by such factors as a stronger-than-expected U.S. economy, more favorable property/casualty pricing and organic growth gains in both commercial and personal lines, Reagan Consulting President Kevin Stipe said in the statement.

“Agency and brokerage firms have shown remarkable resiliency after a disappointing first quarter of 2017,” Mr. Stipe said in the statement. “Firms participating in Reagan Consulting’s Organic Growth and Profitability (OGP) Survey are reporting greater confidence, forecasting 5% growth for the remainder of the year.”

Profitability, defined as agent-broker earnings before interest, taxes, depreciation and amortization, or EBITDA, also reversed course, surging to 24.6% in the second quarter.

“In previous quarters, EBITDA margins have continued to recede, and first-quarter 2017 was the lowest among our surveyed brokers in five years,” Mr. Stipe said. “That changed in the second quarter, though, when brokers reported an EBITDA margin of 24.6%, up from 23.1% in the year-earlier quarter.”

Reagan Consulting cautioned that EBITDA margins tend to hit their highest level in the first quarter, due to the reporting of contingent income, and decline over the course of the year.

“Pleasant surprises in the second quarter were robust organic growth in commercial lines, which rose to 3.9% from 3.1% a year earlier, and in personal lines (2.3% from 1.7%). The 2.3% organic growth in personal lines was the fastest growth rate since 2013,” Mr. Stipe said.

Merger and acquisition activity among agencies and brokerages remains very strong, Mr. Stipe said, with historically high deal volume over the last two years. The pace is continuing in 2017, with 255 deals reported by SNL Financial in the first six months, ahead of the 221 reported in the same period of 2016.

Despite the consolidation, Mr. Stipe said the number of agencies has increased during the last 10 years, according to the 2016 Agency Universe Study by FutureOne, a collaboration between the Independent Insurance Agents and Brokers of America and various insurers.

“What happened during that time is agencies have regenerated at a rate greater than consolidation,” Stipe explained. “Simply put, don’t count out agency and brokerage firms. They are showing great resilience and growth, and they continue to attract capital.”

Reagan Consulting has conducted quarterly surveys of agency growth and profitability since 2008, using confidential submissions from more than 150 midsize and large agencies and brokerage firms.


Insurtechs turn up the heat

Insurers face an uncertain future amid increasing pressure from insurtechs, according to interviews with industry leaders.

The inaugural Insurance Industry Report by technology services provider TAS warns insurers are struggling to leverage data analytics and overcome the constraints of legacy systems.

Half of participants in the survey are concerned about the rapid rate of change in the sector due to disruptive innovation, with 20% highlighting “how to innovate and adapt to disruption” as the biggest challenge in the year ahead.

“Incumbents are experiencing a sink-or-swim mentality, with leaders acknowledging that they need to keep up, but expressing uncertainty about how to best do this,” TAS says.

For 21% of participants, the second major change affecting the sector in the year ahead is market consolidation, with mergers and acquisitions activity shaking up the industry.

For about one-third of industry leaders interviewed, legacy systems pose the biggest risk to business success, slowing companies’ embrace of innovations such as telematics, Big Data and robotics.

Leaders are further challenged by the industry’s negative reputation (22%), tech-led disruption (22%) and the rate of new market entrants (11%).

Maintaining margins and remaining cost-competitive keeps 27% of leaders awake at night, while 20% are concerned about client retention.

For one in three, embracing an innovative culture will help drive an enhanced focus on the customer.

Of the leaders championing innovation, more than half are focused on internally led improvements, with disruptive new technologies paving the way for more streamlined operations.

Leveraging disruptive technology is identified as the biggest business driver for the year ahead (22%). This is followed by forging more strategic partnerships (19%), reviewing internal operations and procedures (19%) and adopting a more customer-focused sales and marketing approach (15%).

In terms of investment, 61% of leaders report an increase in spending for the year ahead, while the remaining 49% expect either no change or a reduction.

The areas in which insurers are investing mostly include internal training and development, strategic partnerships with insurtechs and new technologies.

TAS CEO Shane Baker says Australia’s insurance industry is at “a tipping point”.

“Insurers are concerned about the outlook and how best to adapt quickly rather than be left behind. Until now, insurers have felt that regulation would protect them from disruptive market forces – but that is no longer the case.

“In the year ahead, we will see further consolidation. The insurers that prosper will be those that get behind innovation, drive strategic partnerships with insurtechs and challenge themselves to continually innovate and better service customers.”

The report draws on in-depth interviews held between February and June with 50 leaders from a broad range of private and publicly listed insurance companies.

Mr Baker told insuranceNEWS.com.au the study will be repeated annually.

“We have more than 50 financial services companies as customers, and we really wanted to explore what is going on in our marketplace. We have seen some of these changes in the banking sector and it has become very relevant to start looking into insurtech.

“This first report has been a pulse-check of the industry, and in future we will dive much deeper. The report shows there is a clear realisation that insurers need to do something now. That sink-or-swim rhetoric is coming very much from themselves.

“They know they need to change and disrupt from within, or they will be disrupted by someone else. The next challenge is how to do that.”


As Obamacare twists in political winds, top insurers made $6 billion (not that there is anything wrong with that)

It’s easy to think the nation’s entire health insurance market is paralyzed by the nasty debate over Obamacare in Washington. But, while Congress battled over health reform this spring, the nation’s largest health insurers racked up strong profits in the second quarter thanks partly to less exposure to the Affordable Care Act marketplaces.

Combined, the nation’s top six health insurers reported $6 billion in adjusted profits for the second quarter. That’s up more about 29 percent from the same quarter a year ago — far outpacing the overall S&P 500 health care sector’s growth of 8.5 percent for the quarter, according to Thomson Reuters I/B/E/S data.

“A lot of the companies have downsized their exposure to the public exchanges,” said health care equity analyst A.J. Rice, a managing director at UBS. “The core business, which is providing coverage to large and mid-sized employers… and the established government programs, Medicare Advantage and Medicaid managed care, have all done well.”

Aetna, Humana and Cigna all saw adjusted earnings rise more than 45 percent from the year ago quarter, despite the fact that they continue to experience losses on Obamacare individual plans. Centene and UnitedHealth Group’s adjusted profits were up roughly 25 percent from a year ago; Anthem was the laggard, with its earnings up just 2 percent.

The strong earnings are driving share gains, with all six of the top insurers’ stocks hitting all-time highs this summer. The S&P 500 Managed Care sector is up 25 percent year to date.

What’s driving insurer profits?

Taming medical costs

One major tailwind has been their ability to control medical costs. Most see costs rising in the mid-single digit range again this year. Cigna, the nation’s fifth largest health insurer, said that much of that is being driven by the changes in plan design in the large employer market, which covers nearly 180 million Americans.

“They’re seeing the benefit of this lower medical cost trend for their respective portfolio based upon the actions we’re driving and continuing to drive for them,” said Cigna CEO David Cordani on the company’s second-quarter conference call. Though, Cordani noted that even within the individual exchange business, medical costs growth is trending better than the company expected.

Analysts say that increasing use of high deductible plans is helping rein in medical spending, in part by driving down the use of hospital emergency rooms. A number of the hospital providers reported lower volumes this quarter.

“It’s not so much that (insurers are) getting great concession from hospitals,” explained Rice. “Employees have much more upfront costs… and maybe they’re taking a look at some utilization.”

Boost from government health plans

The Medicaid and Medicare markets are increasingly driving insurer topline growth, and that is where the plans are setting their sights on expansion. Aetna now derives more than half of its revenue from government plans, and after abandoning its merger deal with Humana, the insurer is focused on growing its Medicare Advantage market share on its own in 2018 and 2019.

“The general trend is growing the portion of health care claims that are directly or indirectly paid by the federal government,” said health care ratings analyst Deep Banerjee, a director at S&P Global Ratings.

Beyond the appeal of the growing number of baby boomers aging into Medicare, Banerjee says the government health programs represent mature, more predictable markets for the large insurers, than the three-year old Obamacare program.

“If you look at Medicare Advantage, it’s a public-private partnership,” said Banerjee. “Even with a single payer in a public-private partnership, insurance companies are very involved in managing the costs, and actually running the program for the state or the federal government.”

And as state and federal officials governments look to cut costs in programs like Medicaid, they are increasingly turning to the insurers.

Waiting out Obamacare uncertainty

That’s not to say that the big insurers are not worried about the Obamacare market. Centene and Anthem are the largest national insurers on the exchanges, and both are still planning to offer plans next year, as is Cigna.

With 2018 open enrollment slated to begin in less than three months, large and small insurers are sweating whether the Trump administration will continue to pay cost-reduction subsidies for low-income enrollees and whether the health insurance tax will be reinstated next year. They are also watching to see whether a proposed bipartisan short-term stabilization plan floated by Tennessee Senator Lamar Alexander will gain support when Congress returns from its August recess.

Yet, even before the ACA, large insurers have had a tougher time with the individual market than regional players.

“This is a market they’ve never been able to break into very well,” explained Rice, of UBS. “They’ve found it really tough to find the right model.”

Centene is among the few large insurers that is starting to manage its exchanges plans profitably. Some Blue Cross insurers are also starting to see cost trends on the exchanges stabilize, after raising rates to account for the older, sicker risk pool in the last year.

The industry argues that with more permanent reinsurance funding to offset losses on the most expensive consumers, similar to the Medicare program, the individual exchanges could find their footing, and consumers could begin to see better pricing.

But, it is a work in progress,” said Banerjee.

And for now, most large insurers are finding it pays to wait it out, when it comes to Obamacare.