U.K. insurance and reinsurance broker Jardine Lloyd Thompson disappointed shareholders and analysts with its 2005 results. It posted an after-tax profit of £51.2 million ($88.9 million) for 2005, down from the £59 million it made in 2004. Its 2005 profit before tax, exceptional items and impairment charges was £76.8 million, down from £96.2 million in 2004.
The company blames the downturn on the effects of certain currency transactions, which reduced pre-tax profits by £9.3 million, and the fact that its income from contingent commissions fell by £6.4 million. JLT has largely abolished contingent commissions, but it still receives them in the U.K. where it is competing with regional U.K. brokers that accept the commissions.
The company also blamed its slow revenue growth on competitive insurance market conditions. Fee and commission revenues increased by 3% to £484.4 million in 2005 from £468.1 million in 2004.
To make matters worse, JLT said it expected little better for 2006. “At this early stage in the year we do not anticipate more than a modest overall improvement in the group’s trading performance for 2006 from that reported for 2005 as a whole,” the firm said in a statement.
“The results were dull,” says Joanna Parsons, analyst at investment bank ABN Amro in London. “They were a bit lower than we were expecting. The company also predicted a dull and unexciting 2006.”
Others agree. “It was a very disappointing set of results,” says one analyst, who asked not to be named. “The soft pricing environment had a big impact on the top line.”
The anonymous analyst was also discouraged by the tone of JLT’s announcement. “I thought the company would have come out more positively about its business model and expectations going forward,” he says. “It still seems to be inward-looking.”
Shareholders are also clearly unimpressed with the results. On March 7, the day the results were released, the share price closed at £3.75, compared with £4.45 on March 6.
JLT believes that some analysts’ expectations of its profits and revenue growth were too high because they had thought insurance and reinsurance prices would harden across the board after heavy U.S. hurricane losses last year. Because brokers are generally paid a percentage of the premiums they place, many believed they would be big beneficiaries of this expected rise.
But prices only increased in those areas most affected by hurricanes, such as marine and offshore energy. Only 15% of JLT’s risk and insurance revenues come from areas that were most affected by the hurricanes, and so the firm’s results were still hit by price competition.
Parsons acknowledges this. “The company advised that it is not in the best position to take advantage of the increased rates,” she says.
Others feel, however, that JLT has not done enough to try and stave off the slump in revenue growth. The anonymous analyst thinks it has been clear for a while that the soft market would make revenue growth harder to come by. “I’m a little disappointed in that the action the company seemed to be taking was not particularly firm,” he says. “Last year they had an opportunity. They could have looked to do something. It doesn’t seem that there was any action taken over the past 12 months.”
JLT says that in 2005 it continued to convert brokerage revenue into fee revenue to counter the effects of the competitive insurance market. Fees are fixed payments that are not dependent on premium levels.
At the same time as it announced its results, JLT also announced that it would be merging its JLT Risk Solutions and JLT Corporate Risks divisions under the name Jardine Lloyd Thompson. JLT Risk Solutions is the firm’s London and Bermuda wholesale and retail operation, and JLT Corporate Solutions is its U.K. retail business. It did this for two reasons – to simplify the structure so there is only one brand in the U.K. market, and to cut costs.
Parsons was not surprised by the move. “This is part and parcel of the recognition that something has to be done to get back on track,” she says.
But the anonymous analyst is sceptical that the merger will improve matters much. “I would caution against expecting that this will lead to significantly increased revenue or reduced costs,” he says.
Since new group chief executive Dominic Burke took over at the end of last year, the company has been conducting an operational review. This will look at all areas of the business to see where improvements can be made.
It appears, however, that JLT will not put itself up for sale to improve its situation. “I passionately believe in the independence of JLT,” said Burke at JLT’s results press conference. “Those that gave me the job knew this. This is the mission statement upon which I am operating.”
