Two years ago, Leicester City were fighting to get out of English football’s second tier. Having won promotion, in April last year they were odds-on favourites to be relegated straight back to the Championship, sitting bottom of the league on 19 points with nine games to play. No team in Premier League history had ever escaped from a hole quite that big.
The rest, of course, is history as players like Jamie Vardy, who was playing non-league football for Fleetwood town as recently as 2012, and PFA Footballer of the Year Riyad Mahrez, plucked from the obscurity of Le Havre in the French second division in 2014, have fired the Foxes to a historic title success.
Leicester’s rapid rise is a real footballing fairy tale, unprecedented in the Premier League era. But once the victory parade is over and the Champagne has gone flat, the club’s owners and management face some big decisions when it comes to protecting their key asset – the players, worth little a year ago, are now of critical importance to Leicester City’s financial future.
Fortunately for the Foxes, help is at hand from a football-loving Englishman based in Chicago – Andy Carvill, CEO of Avoca Insurance Holdings. Along with a small team in the UK comprising insurance and sports medical expertise, Carvill has set up Avoca Elite Sports to offer ‘business critical insurance protection for leading European football clubs’. AES has worked with a number of Insurance and reinsurance giants to develop ground breaking insurance coverage which allows clubs to protect their balance sheet from the financial impact of significant injuries or illnesses to players.
“We insure commercial property for the most part, so this is my guilty pleasure,” says Carvill. “Everybody loves talking about football so it’s great to be involved professionally in something that interests me personally. The exploding value of the top European squads and what it means as a business asset to those clubs is central to what we’re doing. There has been unbelievable revenue growth in football over the last 25 years. What you had in football for many years was described by accountants as the ‘trophy asset’ model. Clubs didn’t need to concern themselves too much with making an operating profit every year because the equity value was rising so sharply. Michael Knighton had a board-accepted bid of £20m for Manchester United in 1988, then in 1998 there was a board-accepted bid from Rupert Murdoch for about £623m – both fell apart for different reasons. The Glazers ended up buying the club for just under £800m and it’s market cap today is £1.9bn. The point is that for many years these clubs weren’t worried about making money, there was just this concept that someone else would come along at some point and want to buy the asset, the trophy.”
“As the game developed, there was tremendous revenue growth yet the transfer cost of players and sharply increasing wages ensured that money was ending up in the hands of the players and their agents. As the economic crisis took shape in 2008, clubs recognised that buyers willing to take on loss-making businesses in the hope they would be able to offload the business down the line began to dry up. So they basically said ‘we have to live within our means’, hence the emergence of the Financial Fair Play concept alongside a concerted push to drive the financial performance of the clubs.
“So that’s the general background – it’s now a much more professional game, there’s this huge spike in revenue which has been followed by this huge inflation in the value of players and the wage bill. The relationship between a club’s revenue and its playing squad as an asset value is stretching out. The squad is now in many instances worth a lot more than the revenue. With Leicester, there’s going to be a substantial increase in the value of that squad so that asset base becomes much more material.”
As English football has changed, overseas owners have been attracted by its ever-increasing riches – Leicester City’s owners hail from Thailand – and American sporting conglomerates have moved in. Our model, however, is different to the USA’s. Relegation is not a problem in the US major leagues – it doesn’t exist. In England, it’s an ever-present danger.
“The issue of relegation is really gargantuan now, despite the structure of parachute payments,” says Carvill. “The chance of a relegated club bouncing straight back to the Premier league is statistically exactly the same as it dropping down another level. The issue with relegation is if you go down another level, you essentially blow up all of the equity within the club.”
Leicester’s success is so unusual because it blows apart what has been an absolute truth in top-level European football for many years – a squad’s value and wage bill will pretty much directly correlate with the club’s final league positon. Carvill uses the example of Hull City, relegated from the Premier League last season despite having a squad which should, on all standard metrics, have finished comfortably above the bottom three. However, £7m summer signing Robert Snodgrass dislocated a kneecap before August was out, and missed the rest of the season. He’d scored 12 Premier League goals for Norwich the season before, and if he’d repeated the feat for the Tigers they would not have been relegated – and not missed out on their share of Premier League riches.
Avoca’s product mitigates that risk by effectively placing a ‘stop loss’ on the financial impact of such injuries and illnesses above a manageable annual cost that the club can financially absorb. The cover seeks to recognise the real financial impact to a club of losing key assets for an extended period. Per player limits are based on the club’s financial exposure to a given player, typically based upon current transfer value. It’s precisely the sort of cover Leicester may feel they can’t afford to be without.
“Leicester City’s sporting success is wonderful,” said Carvill. “The financial success as a result of this is going to be a game-changer for the club. The asset value in their squad, their ability to scout players, acquire them and get them to perform well together on the pitch is going to lead to an enormous increase in the intangible assets of the club. Our advice would be that they should evaluate the risk factors associated with that prized asset base.
“The risk factors include players being away on international duty – Jamie Vardy would never have played for England without Leicester’s success, he wouldn’t have been at the Euros this year, he’d be sitting on a beach somewhere. Vardy’s value has gone up but now they have an exposure to him playing internationals. They’ve obviously done a fantastic job on the sporting side of the business, with picking the manager and developing their scouting network – now the business side should be looking at all their risk factors and considering what the cost would be of working with third party commercial risk takers to protect themselves.
“A lot of clubs run this risk 100% self-insured but massive commercial insurers are far better-placed to insure that type of exposure. The insurers have all this capital on their balance sheet and they have to allocate it to exposures around the world, so the capital that can be deployed to write this kind of risk is effectively non-correlated with anything else. So insurers have an efficiency in how that can insure against the catastrophic event – say the team bus turning over. They can insure that because they can offset it against everything else they do. The problem for the football club is they literally cannot afford, within the confines of their balance sheet, to keep that risk.”