Xchanging is buying out insurance giant Aon from the enterprise partnership (EP) they set up in 2006 to target third party policy and claims administration opportunities in the London insurance market.
Xchanging is paying Aon £10m for its 50% shareholding in the EP known as Xchanging Broking Services (XBS) in two instalments – the first £4m being due now, and the remaining £6m in one year. Xchanging will also pay Aon £540k to cover its finance charges on the second instalment. Xchanging's CE Ken Lever said that by taking on 100% of XBS it will simplify Xchanging’s business structure. The move forms part of Lever's 'Four Part Action Plan', instigated in May to turnaround Xchanging's fortunes (see Xchanging’s reshaping gets underway) - it has since spurred a period of restructuring, divestments and winding down underperforming assets (see Xchanging winds down what’s left of CISGI).
Although it is unclear to us whether the £10m price tag paid is good value, the partner buy-out is exactly how Xchanging’s EP model is supposed to work - operate it as joint venture for five years, then buy out the customer’s share, and keep the BPO deal, as it has done in this case. There should be plenty of Aon business to support too, since in January , Xchanging extended the EP contract, which was originally for ten years, after it also won its first general insurance opportunity with Aon Australia’s Risk Solutions business.
While the EP has been successful within Aon, we suspect it has been less so growing new third party business outside Aon. Xchanging will be hoping that full ownership makes this now an easier sell. Although we don’t have numbers for the performance of XBS, at group level, Xchanging’s insurance business has struggled - in FY10 revenue fell 2.2% to £258m, although it delivered a healthy 12.8% margin.
This buy-out was expected. On taking over the role of acting CEO in February, Lever said Aon was likely to exercise its put option on the EP in 2011. He also said that another EP partner Allianz could well do the same - its EP with Xchanging is called Fondsdepot Bank GmbH (see Xchanging founder falls on his sword (update)). In addition, Xchanging has five other EPs - Xchanging Claims Services (with Lloyds of London), In-Sure Holdings (with the International Underwriting Association), Xchanging etb GmbH (with Deutsche Bank) and Kedrios (with SIA-SSB), the latter of which has already been earmarked for review because it won’t break even till 2013. We think it's only a matter of time then before Lever embarks on more EP restructuring.