Legal opening beckons for Abbey Protection

October brings the long-awaited deregulation of the UK’s £23 billion legal services market, and it will not come a moment too soon for Abbey Protection, the AIM-quoted company that provides legal and professional fees insurance, as well as legal and tax advice, to small and medium-sized companies.

Described as the law’s equivalent of the ‘Big Bang’, which transformed the City 25 years ago, and dubbed ‘Tesco law’ by supporters and critics alike, the impending changes have already encouraged large consumer-oriented groups such as the Co-op to prepare to plan their own legal services, and Abbey is determined to grab its own share of the action.

Chris Ward, managing director and 15.7 per cent shareholder of London-based Abbey, which recently revealed a 9 per cent pre-tax profit increase to £9.6 million on turnover up 6 per cent to £35 million, says the company has also taken an option to buy a small, two-partner law firm to complement the efforts of the 60-plus lawyers it already employs.

Abbey, which plans to develop its thriving legal and tax consultancy activities further, will not seek to take on the big law firms in areas such as corporate finance, but aims to build on its existing strengths, expanding its services from advice and employment concerns to the full range of county court issues, including litigation between customers and suppliers.

According to Ward, ‘the big areas’ for Abbey will be work now handled by high street law firms and possibly work outsourced by some of the big City law firms. ‘We shall do dirty litigation for small and medium-sized companies,’ he suggests, ‘but we won’t get involved in complex areas like intellectual property and patents.’

Strategy
Such an expansion would fit in well with Abbey’s existing mix of services and plans for the future. The company, which derived £20.3 million of its turnover last year from intermediary, advisory and other income and £14 million from insurance premiums, provides its clients in the smaller company sector with cover for employment tribunal costs and offers individuals cover for the cost of tax investigations as well as business-to-business litigation.

Abbey, keen to avoid the volatility of Lloyd’s premium rates, underwrites the risks itself in partnership with the fully listed BRIT insurance group, and its in-house Ibex arm reinsures them through a carefully worded and annually renewed binding authority with BRIT, in the process making £4.6 million last year, up 10 per cent and contributing almost half of Abbey’s overall profits.

Ward looks at the company’s overall results for last year with ‘quiet satisfaction’ and says he is pleased with progress in the first quarter of 2011. In an environment of austerity, belt tightening and even collapse among smaller companies, Ibex managed to avoid any significant impact from recession-led employment claims thanks to prudent risk management controls, with a ‘most pleasing’ fall in employment-led claim notifications during a year in which employment tribunal claims nationally showed an increase of no less than 56 per cent.

In competitive market conditions, the company had to reduce its premiums to some extent, but kept them at levels adequate to cope with a potential claims upturn. According to Ward, that stance cost Abbey some business, but he says some of that is now starting to come back from clients dissatisfied with the service provided by some of the company’s more aggressively rate-cutting competitors.

Abbey’s legal and tax divisions and Ibex together provided 96 per cent of last year’s profits and 88 per cent of turnover. The tax side faced particularly strong competition, as practitioners vied for business while an unexpected reduction in tax inquiries by Her Majesty’s Revenue and Customs reduced customer demand, though Abbey still achieved a 96 per cent renewal rate for its core fee protection product and won £700,000 of new business.

Now, reports Ward, the taxman is ‘back on track’, with inquiries rising again just when last year’s pain has weeded out the weaker competition and with it the downward pressure on rates. One business area that scored last year was specialist consultancy, including tax planning insurance and capital allowances cover, chiefly for accountants, which boosted revenues 145 per cent to a still-modest £1.1 million.

Colin Davison, Abbey Protection’s chief executive, says this division is looking to expand by introducing new products for its accountancy clients. In its legal fees insurance business Abbey has been facing increased demand, showing the counter-cyclical features of its business.

Some of the clients for this service, such as the Federation of Small Businesses, did not generate growth, with static membership, which Ward suspects might now fall as companies fold and start-ups hang back. However, Abbey has made up for this by targeting smaller affinity groups, where there are regulatory issues and disciplinary inquiries.

Ward singles out optometrists and swimming coaches as examples of groups for which the company can arrange ‘bespoke cover’. Elsewhere, cyclicality did not work altogether to Abbey’s advantage, with the company’s legal advice centre suffering a tailing-off of calls to ‘pre-recession levels’, but it reacted by cutting staff numbers, winning nearly £1 million of new sales and pushing pre-tax profits up 11 per cent to £2.2 million on revenues 6 per cent ahead to £9.6 million.

One field in which the company has been active is ‘after-the-event’ insurance, which clients take out once legal proceedings involving them are contemplated after something has happened to provoke this. Abbey successfully launched a new commercial after-the-event insurance, generating initial sales of £600,000, but this division’s contribution to profits was static, because of the ending of run-off contracts to administer old policies taken on in 2003 but mostly expiring in 2009 and 2010.   
         
The whole after-event sector is in a state of uncertainty following the government’s acceptance of Lord Justice Jackson’s Review of Civil Litigation Costs. Among many recommendations, the review envisages preventing successful claimants in civil cases from recovering their after-the-event premiums from defendants.

Some in the business argue that the Jackson review sounds the death knell for after-event insurance in Britain. However, Davison, while accepting that the government response to the consultation exercise launched after Jackson reported will mean ‘significant rule changes’, maintains that ‘we remain ready to adapt our insurance product accordingly’.

The company, which ended last year with cash down from £29.6 million to £18.9 million, has grown through acquisition and remains determinedly acquisitive. But, as Ward explains, apart from one modest deal last year, of late it has not clinched the takeovers it identified, either because on closer inspection they have turned out to be ‘poorly run’ or because the owners wanted too much for them.

Abbey is still looking. Ward suggests the continuing ramifications of the recession may provide welcome fallout in the shape of ‘fire sale opportunities’.

Management
Tony Shearer, an accountant and Elvis Presley fan who headed merchant bank Singer & Friedlander before its takeover by Iceland’s ill-fated Kaupthing bank in 2005 and blamed regulators for the subsequent debacle, chairs Abbey Protection, with Colin Davison, another 15.7 per cent shareholder, as chief executive. Davidson founded the original Abbey Tax Protection component of the company in the 1990s and became chief executive officer of the whole group in 2004 after a management buy-out of the original majority shareholding.

Davison brings experience gained during a six-year stint with the old Inland Revenue to handling tax matters on the other side of the fence. He and Shearer masterminded the company’s AIM float in 2007.

Chris Ward joined the Abbey Legal Protection side of the business in 1996 after 17 years in the insurance industry. He spent much of that time with the Prudential, where he became London market casualty account manager, heading the professional indemnity and contingency accounts.

Now, Ward is responsible for all aspects of Abbey’s legal business divisions with gross premiums of more than £24 million. He has overseen the development of the company’s legal services and after-the-event operations, as well as the establishment of Ibex.

Finance director Adrian Green joined  Abbey in 2006 after gaining wide experience in general insurance underwriting and broking. Following seven years with Belgian insurer Fortis, in 1997 he joined Folgate Insurance, where he became finance director in 2002 and, after another insurer, Towergate, bought the company, he managed the run-off of Folgate’s business before becoming regional finance director for Towergate.

Prospects
Shearer says Abbey expects to increase revenues and profits further this year, though he foresees challenges in most of its areas of operation, as clients face tougher trading conditions, with pressures on their employment levels and income. While maintaining its quest for suitable takeovers and hoping potential vendors have adjusted their expectations to today’s reality, he looks forward in particular to legal deregulation later this year.

‘We are well positioned to take advantage of the opportunities in this market,’ he declares, pointing out that Abbey’s plans are well advanced for the expected granting of the first licences in October.

As Ward and Davison stress, the company will not try to be all things to all people in legal services nor to take on the big City solicitors at their own game of corporate finance, but, rather, to focus on those areas of law that will be most useful to its small and medium-sized company clients.

House broker Numis detects ‘cautious optimism’ at Abbey that last year’s intense pricing competition is starting to ease, as weaker players head for the exits. The consensus of City forecasts sees modest pre-tax profit increases to £10 million this year, with £10.3 million on the cards for 2012, for earnings of 7.4p and 7.7p a share respectively.

But how successful Abbey’s planned move into legal services proves to be will have a major potential impact on profit prospects. And, if the company does find a suitable acquisition at the right price, that too could have a significant medium-term impact on the bottom line.

Valuation
Since its 2007 AIM float at 55p a share, Abbey has hardly been a stunning AIM performer. Over the past year, the shares, which are fairly tightly held, have traded in a narrow range between 76.5p and 85.5p and now change hands at 80.25p, for a hardly demanding prospective price-to-earnings ratio of 10.8.

The pace could quicken if the company succeeds in both its legal and acquisition strategies. Moreover, in today’s yield-conscious markets, Abbey’s progressive dividend policy should win it friends.

The company has upped its full-year payout eight per cent to 4p a share, for a historic yield of five per cent, more than three times current banks’ base rate. Analysts suggest a possible increase to 4.28p this year, for a prospective yield of 5.3 per cent a share.  
        
And, if Abbey really still cannot find an appropriate takeover at the right price or if it finds only a relatively modest one, Ward suggests ‘we may return some of our cash to shareholders’, including himself and Davison.

On a medium- to long-term view, Abbey Protection offers good value.