MOVING FROM the finance function at the world’s largest insurance broker to a small, if rapidly growing, brokerage firm in the UK might seem a sideways career move at best but for Eric Fady, FD of Hyperion Insurance Group, the move is paying off.
Fady, a French national who began his career as an auditor with KPMG, joined the international insurance broker and underwriting group in 2008, having most recently served as finance director for Marsh Europe, Middle East and Africa at just the time when its parent, Marsh & McLennan Companies, was subject to the furnace of a bid-rigging lawsuit led by Elliot Spitzer, the then governor of New York.
After his four-year stint at Marsh between 2003 and 2007, which encompassed the fallout from the Spitzer investigation and subsequent lawsuit, Fady says he was able to move to a firm, albeit much smaller than Marsh, where the culture was about improving profits by growth rather than trimming costs.
“The focus of the profit improvement plan at Marsh was all about cost optimisation,” Fady explains. “It was a very different culture and there was no organic growth plan in place, so the focus was on the cost to improve the bottom line.”
Nevertheless, Fady clearly benefited from working through the most challenging period in the broker’s history. Spitzer, whose crusades against corporate sleaze earned him the nickname “Sheriff of Wall Street”, sued Marsh & McLennan in October 2004 over allegations the firm rigged bids and took kickbacks from insurers.
On the day the suit was filed, MMC’s stock nosedived 26%, wiping billions of dollars off its market cap. In January 2005, Marsh agreed to pay $850m to settle the case, which was taken from its 2004 fourth quarter accounts, along with a $618m one off charge. A major restructuring and thousands of job cuts followed as the broking giant searched for annual savings of $375m.
Although Fady was only a divisional CFO at the time, the problems of the parent clearly had to be dealt with by finance teams throughout the business as the company adjusted to the post-Spitzer world.
“The company nearly went bankrupt overnight,” Fady remembers. “The margin went from 25% to 5% overnight. So suddenly there was a need to look at the business with a completely different lens, which was: where did Marsh make money?”
Fady explains that executives at Marsh Europe led the “massive profit improvement plan” for the European section of the business, which meant looking at which segments, geographies and products that were most profitable.
“As of 2008 Marsh stopped doing business where you don’t make money. We worked with managing directors and FDs to come up with recommendations and, more importantly, make sure they implement,” he says.
Fady’s experience since moving to Hyperion could barely have been more different. While both MMC and Hyperion both operate in insurance broking – Hyperion is a holding company with divisions in broking and underwriting – the gulf between the two businesses is vast. In 2013, the insurance arm of MMC reported revenues of $5.4bn. Hyperion, by contrast, delivered sales of £166.6m and an EBITDA of £35.9m.
The real story is the firm’s growth. Hyperion featured in the latest Sunday Times Profit Track 100 as one of Britain’s 100 private companies with the fastest-growing profits. According to its latest annual results, EBITDA increased by 74% in 2012, contributing to a compound annual growth rate of 41% over the past five years.
One of the challenges for finance and the wider business, Fady explains, is making sure there is the “right level and number of people with the right skills to support that growth”. Driven by a mixture of organic and M&A-led growth, Fady says finance had to make sure it “was equipped to deliver value”.
What that meant was implementing new systems. “Before I joined everything was done on Excel. We moved to a proper system. We implemented worldwide policies,” he explains. “We appointed Deloitte as our auditor in nearly all of the countries we operate in. We adopted IFRS three years ago and recently hired someone to run treasury.”
Expansion has come by service line and by territory with much of this being driven by a flurry of acquisitions. Howden Broking Group, the holding company’s broking arm, acquired Lloyd’s of London broker Windsor in 2012. Following the integration, the acquisition contributed to a 108% increase in UK revenues and a 54% increase in sales from the Americas.
In February 2013 Hyperion acquired 55% of Asian marine broker FP Group, which contributed to a 54% increase in revenues from Asia Pacific, while the business also acquired controlling stakes in operations in Brazil and Norway.
Fady says deals are “filtered through a strategic analysis” and that deals are often structured so that Hyperion doesn’t buy a 100% stake up front. “We buy 51% or 75% and are quite happy for management to stay after the transaction to benefit from the growth of value through an earn-out,” he says. “We don’t have to micro-manage and our interests are aligned.”
Hyperion goes on to buy management out over a three to five years through a mix of cash and shares to “create the next stage of alignment”.
IFRS for IPOs
Hyperion’s part ownership model when making acquisitions is not dissimilar to its own hybrid ownership model, which comprises a 30% stake from global growth equity investors General Atlantic, a 30% holding from its founders, less than 5% non-employee shareholders with the remainder held by employees.
“It is quite a unique balance between the founders, private equity and employees,” Fady says. However, the balance is likely to change when the business finally launches its much anticipated IPO.
General Atlantic bought into Hyperion in March last year, acquiring the shares from 3i and BP Marsh. At the time of the deal, Hyperion’s chief executive David Howden said GA would provide “long-term stability” to Hyperion’s investor base and, with both private and listed companies in GA’s portfolio would bring “important experience to the table as we prepare to go public”.
Howden poured cold water on talk of a near term IPO in January last year, though a listing in the latter half of 2014 is not out of the question. Nevertheless, an IPO has been in the making for some time and goes all the way back to Hyperion’s decision to adopt IFRS.
As a private business there is no obligation for Hyperion to adhere to international reporting rules, though it will have to if it is to go public. According to Fady, the businesses needed three years of IFRS reporting data to go public so the process was started in 2008.
“We had to decide when we should we move to IFRS and when should we move through the pain. We decided to go early and it was a good decision because we get used to our data,” Fady says.
“IFRS is a very different way of looking at figures. Some fundamental things don’t change; the way of looking at revenue is the same. Its more everything else; for goodwill there is no amoritisation any longer. There is fair value adjustment of different considerations, which is quite important to us because we do lots of earn outs.”
With a Big Four auditor, a history of IFRS and a long-term investor on board an eventual IPO appears an inevitability.
IN BLACK & WHITE
2008-present FD, Hyperion Insurance Group
2002-2007 EMEA CFO, Marsh
1999-2002 Europe VP strategy implementation and CFO, Dun & Bradstreet
1997-1999 European FD, Dun & Bradstreet
1994-1997 French CFO, Dun & Bradstreet
1986-1994 Various roles, CIC Bank
1981-1986 External auditor, KPMG France