Source www.trendwatch.co.uk 1 September 2004

January 14 2005 is a date that will soon be engraved on the hearts of anyone managing or owning any insurance company, large or small. On that day, almost all general insurance companies, including insurance brokers, will be regulated by the FSA.

Trendwatch publications is, of course, also regulated by the FSA. As a media business, compliance with the massive FSA rule book is considerably less onerous than it is for business that hold client money for investment or insurance purposes. Even so, grappling with the FSA can be like mud wrestling a multi-headed hydra.

To give one small examplee, we recently found out that, to add letters Ltd after ourname )no other changes to the business whatsoever) requires the completion of between 50 and 60 pages of forms and the preparation of much other supporting documentation. The FSA will not even deign to look at it unless it is accompanied by a cheque for 1,500. If everything then seems to be in order, the FSA undertakes to deal with the matter within 6 months.

If, in our infinte naivete, we had failed to realise this palava was a legal requirement, the MOther of All Parliaments has decreed that we would be committing a criminal offence, and liable to be detained at Her Majesty's pleasure at a house of correction and her learned judge's choosing.

This is what the FSA regards as'light touch' regulation which minimises disruption and cost ot businesses.

Now imagine how tricky things can get if you attempt something really complicated such as taking on a member of staff.

The FSA estimates that it already has about 10,000 in the mortgage and general insurance field by the short and curlies. It estimates that at least another 10,000 business will be dragged kicking and screaming into the brave new world of 'light touch' regulation. Around 2,500 insurance brokers will be lightly touched by the FSA on January 14.

But, as everything in life, one mans Kafkaesque nightmare is another man's business opportunity. Which brings us to Broker Network Holdings (BNH)

BNH floated on AIM as recently as May this year (raising 2m in the process), so most investors will know little about it, if indeed they've heard of it atall. We're recommending it because we feel that burgeoning profitability will soon make it a lot better known.

As the name suggests, BNH exists to build a network of independent insurance brokers, all operating within the BNH framework. This follows a path wellbeaten by IFA's, accountants and dentists. BNH is the longest established player in its field and believes that it has a stronghead-start, and a great deal more credibility than other 'me too' imitators.

The system works like this: as an independent insurance broker, you undertake to pay 95 a month to BNH. You also undertake to pass all your insurance business premiums through BNH. BNH places the insurance business with the giants such as AXA, Norwich Union, Royal and Sun Alliance and Cornhill. The members receive enhanced commission from the insurance companies because of the preferential status granted to BNH. Since BNH deals with the placing of the insurance, this greatly reduces the credit risk of the individual members.

BNH takes 1.5% of the premiums from its members and, in return, provides members with a number of valuable support services, including access to Lloyds of London, centralised back-office IT support, marketing assistance, access to e-commerce, staff training and development, business management and monitoring... and FSA compleance support.

BNH is also prepared to purchase broking firms outright where the opportunity presents itself. There are believed to be a large number of small owner-managed brokers where the owner is approaching retirement. For many of them selling theri business to BNH, typically for around 0.3m, rather than grappling with the FSA, is probably an attractive option. So far BNH has acquired 9 such brokers.

Since it was founded in 1994, it has absorbed 133 brokers into its network and plans to acquire about 90 more over the next 5 years. Out of the estimated 19bn paid in insurance premiums in the UK every year, an est 80% is handled by insurance brokers. Most of this goes to through the big brokers, but about 3bn a year (typically commercial rather than personal business) is processed by the 2,500 small so-called 'community brokers' that form the BNH network.

hat represents the extent of BNH's market pond.

At time of floatation, BNH est that no more than 12% of its target broker had aligned itself with any particular network. Clearly there's plenty of scope for growth.

The company is already profitable. Its last full year results were published in July and showed a profit for the principle trading subsidiary - the PLC holding company had not yet been created - of a record 0.77m up rom 0.70m. 27 new members were taken on.

Brewin Dolphin reckons it will make 1.77m this year, rocketing to nearly 3m in 2005-06. If these estimates are correct, it puts BNH on a forward p/e of 6, which is extremely low for the sector, especiallyfor a company whose profits are growing at such a rapid rate

BUY

And up they go again....