And although formal talks between the pair have yet to be confirmed, such a scenario would provide AJ Gallagher with a quantum leap in terms of its reinsurance operation. However, although it would transform Gallagher’s presence in reinsurance, such a deal would likely do little to shake up the highly consolidated reinsurance broking market.
This publication reported on 1 April that the reinsurance unit will be sold as Willis Towers Watson and Aon seek to satisfy regulators over anti-competition concerns and get their mega-merger home.
AJ Gallagher, with its freshly rebranded and ambitious Gallagher Re unit, is the most likely new home for Willis Re, rather than the likes of Lockton Re, Howden or private equity-backed platforms Hub, Acrisure, USI, Alliant, NFP and Ardonagh, for a combination of reasons we explain here.
Below, we look at the implications of a possible Gallagher-Willis Re deal, both for the Illinois-based firm and the wider reinsurance broking market.
1. A coup for AJ Gallagher
With its circa $4bn-revenue primary book, AJ Gallagher is a serious contender in the insurance broking world, and it has stated its intention to push into reinsurance.
The group last year relaunched Gallagher Re, a rebranded Capsicum, which AJ Gallagher invested in and eventually bought outright. Then-CEO Rupert Swallow said he planned to grow the business using the heft of the wider group to obtain “its rightful seat at the top of the reinsurance broking table”.
As our recent analysis shows, Gallagher Re, with its roughly $50mn-$60mn revenues, was named by market sources as one of two top contenders for third place over the long term in a market dominated by Aon and Guy Carpenter, although it is currently less than half the size of the current number-four player, TigerRisk.
Adding Willis Re, with its ~$700mn book of business along with the ~$300mn fac division, would lift Gallagher Re out of its third-tier, sub-$200mn position and allow it to leapfrog the second-tier, $200mn-$400mn revenue position once occupied by JLT Re, into the top tier of reinsurance brokers (see graphic).
Gallagher Re has desirable niches in reinsurance born out of Capsicum’s former structure, in which top brokers with specialty expertise were hired in and given autonomy over their own “cell” within the business. These niches include UK motor, aviation, political risk and violence, cyber, structured credit and trade credit.
It also has presence in marine and energy and global fac, as well as operations in Bermuda and Latin America.
It does not, however, have a significant play in “bread-and-butter" P&C business. Bringing in Willis Re will deliver major P&C business, a well-developed international unit, and boots on the ground in North America, opening it up to a new client group where it had previously had a minimal reinsurance presence.
And the potential benefits are made all the more attractive by the context of Willis Re’s sale.
Given pressure from the European Commission (EC) to sell Willis Re – and following earlier concerns raised by the New Zealand and Australian regulators – Aon and Willis Towers Watson do not have the luxury of waiting for a better opportunity to divest from the unit and must act now.
The need for a fast transaction places AJ Gallagher at an advantage, given the scale and expertise it has in deal-making.
The EC has also been restrictive in its definition of a suitable buyer, steering Aon and Willis away from private equity acquirers and prescribing a business with a strong presence in insurance broking.
With few other suitors able or willing to buy, the field is relatively clear for Gallagher to make this once-in-a-generation play – and may even, given the circumstances, secure a high-quality, scarce asset at a discounted price.
2. The challenges facing a future ‘Willagher Re’
While the possible transaction has clear and exponential benefits for AJ Gallagher, there are challenges facing the future combined entity.
Willis Re benefited from the Willis Towers Watson group insurance consulting and technology (ICT) segment, which allowed it to bring a suite of additional services to clients alongside traditional broking services.
Sources have said the ICT segment is a powerful tool for Willis Towers Watson, comprising a range of offerings including modelling software Igloo, balance sheet advisory services, enterprise risk management consulting and actuarial reviews.
In a world where brokers are shifting ever-further from a purely transactional service to a broader professional services partner for clients, these supplementary services are a significant part of the client proposition – and play a key role in connecting reinsurance brokers to the C-suite rather than the ceded re team.
A future sale of Willis Re will not include the ICT capability, while Gallagher does not have such a comprehensive set of supplementary services.
Although this is a function that can be built up over time, it will likely hold back any future combined entity at least in the short term – and place it at a disadvantage relative to Aon and Guy Carpenter.
The second challenge facing any future combination is that Gallagher has a far smaller retail broking operation than Willis Towers Watson. While the influence of the inwards book on the outwards business in broking is a taboo topic, the leverage a bulky retail book provides cannot be denied, and the loss of this sway could impact a merged Gallagher/Willis vehicle.
That said, Willis has in the past been seen as having had a less coherent link between insurance and reinsurance business than Aon or Guy Carpenter, so the impact of severing it from a large retail book is difficult to determine.
3. For the wider market, the dial barely moves
While this deal would clearly be good news for AJ Gallagher and create a reinsurance business many orders of magnitude larger at a stroke, it would have relatively little impact on the market.
Even when in command of a circa $800mn book (or around $1.1bn with the fac division), a new combined entity would still lag Aon at $1.7bn and Guy Carpenter at $1.5bn. This puts it comfortably in third place, but still a long way behind.
For the wider market as well, the transaction would not shift the dial far.
Three reinsurance brokers (Aon, Guy Carpenter and Willis Re) now control just under $4bn in revenues – and after this possible deal, three reinsurance brokers (Aon, Guy Carpenter and “Willagher Re”) will control around the same amount.
There will still be no mid-tier broker on the scene, and a plethora of sub-$200mn brokers – TigerRisk, Holborn, Acrisure Re, BMS Re, Lockton Re, Howden Re and McGill and Partners – playing in the same space.
While the possible deal will get analysts, investors and brokers hot under the collar, the overall picture will remain largely the same, particularly when it comes to carriers and clients.
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