Oxbow Partners Briefing: The Simply Business Sale to Aquiline Capital Partners
April 11, 2016 Chris Sandilands
This article dissects all of the publicly available information AnaCap’s sale of Simply Business to Aquiline Financial Partners and identifies five things you need to know about the deal.
**NOTE THAT THIS ARTICLE IS BASED PURELY ON PUBLICLY AVAILABLE INFORMATION AND, WHERE NEEDED, OUR ESTIMATES.**
On Friday, the FT broke the news that AnaCap had agreed to sell Simply Business, the UK’s leading online SME insurance broker, to Aquiline Capital Partners, a US-based PE fund (subject to regulatory approval). AnaCap has held the business for 2 years and 9 months.
As there are no public companies involved, there’s not much information available about the sale. Here’s what Oxbow Partners have read between the lines of the various press releases:
Simply Business is doing well, but is it a “disruptor”?
Simply Business is an online-led business, so we’d have happily bet our houses on the word “disrupt” appearing somewhere in the press releases we’ve looked at. And that bet would have paid off: AnaCap note that Simply Business has “disrupted the market through the innovative use of technology”.
We absolutely agree that Simply Business has done a fantastic job at delivering a fresh proposition to the SME market. But its customer numbers have grown from 225k to 350k during the AnaCap investment period – an increase of 56% or just over 17% p.a. This is steady growth but not the mythical “Uber-moment” that the market has been prophesying.
EBITDA up fivefold…
EBITDA has increased fivefold during AnaCap’s investment period due to “operating leverage”. There’s no indication to what extent that is driven by scale vs. efficiency, but this is clearly an impressively run business. One datapoint that supports this is that retention is now “close to 80%” – considerably higher than other online insurance propositions, which are arguably the relevant peer group (as opposed to offline distributors, who generally have higher retention rates in this segment).
…but does quality operations mask underlying strategic challenges?
AnaCap’s press release notes that Simply Business’s revenues grew by 75% over the past three years. This sounds impressive, but when you dig into the numbers you spot some cause for concern.
We estimate that Simply Business’s average premium in 2013 was around £250. This implies an average commission of around 41% to get to 2012FY revenue of £22.9m. The FT article suggests that 2015 revenue was £40m. Assuming that Simply Business couldn’t push its commissions up from this already high level, that suggests that average premiums moved up to £281 (+12%).
We can only guess that relatively low premiums which are not rising fast will be challenging going forward given the cost of customer acquisition and servicing in this model (c.f. average premiums of £500+ in personal lines motor, where there is considerably less need for contact centre servicing).
Underwriting performance must be a big contributor to performance
We know revenue is 75% up over the investment period. I’d assume that this is broking revenue and does not include any underwriting performance. We’re also told EBTIDA has “risen fivefold”. No matter how good the “operating leverage” is, the improved EBITDA cannot be explained by the broking business. (If we assumed that the EBITDA margin was 25% at the point of AnaCap’s investment, the numbers would imply a 72% margin today – impossible.) So the conclusion we must draw is that the profitability of the business is driven by the underwriting performance, not by the dynamics of the broking business.
Next stop USA?
There are no clues in any of the information released so far about what is next for Simply Business. However, we think it’s telling that PE – we presume – saw more value than trade, and in particular that AnaCap has exited to US PE.
We wonder whether US SME insurance about to come under fearsome attack. We note that Berkshire Hathaway launched its D2C proposition earlier this year (www.cyb.com) and it feels like a natural next step for Simply Business. Time will tell.