We lay out the implications for Howden, TigerRisk, Flexpoint and the wider market.
What Howden gets
The benefits to Howden of acquiring an asset like TigerRisk are plain.
Howden has clear ambitions to grow to become a credible challenger to its larger reinsurance broking rivals and pursued that aggressively. This is through both team hires, such as the recruitment of around 25 former JLT Re brokers from Guy Carpenter, and its interest in acquiring Willis Re, ultimately sold to AJ Gallagher for $3.25bn.
At present, Howden’s reinsurance operation employs around 100 people and places about $700mn of premium. The addition of TigerRisk would hand it a highly successful, ready-made specialist reinsurance brokerage – and in fact, the only possible acquisition of its type and size available in the market, outside of, perhaps, the US-based intermediary Holborn, which is also significantly smaller.
The deal would also paint Howden as a business that can make good on bold rhetoric through serial mega-deals.
After its $400mn 2015 acquisition of RKH, Howden did not secure another major acquisition until it bought A-Plan five years later. If it does buy TigerRisk, however, Howden will have landed four major acquisitions – A-Plan, Aston Lark, Align and TigerRisk – within two years for a total outlay of potentially more than $4bn.
Finally, the potential TigerRisk deal may take Howden one step closer to answering an old question around its strategy to gain exposure to the US retail market, the lack of which is a key difference between Howden and its largest broking competitors.
This publication has explored this issue, among others, in a recent deep-dive into the business (Howden: Four critical questions that determine the brokers’ future, 16 September 2021).
Howden has previously refrained from participating in the market due to the dependency of its wholesale business, formerly RKH, on a flow of US retail and a desire to avoid competing with the wholesaler’s US clients.
But with every deal Howden strikes to grow its now-vast UK and European retail network, and the potential acquisition of a $200mn+ revenue reinsurance franchise, the dependence of the group on RKH is diminished. This gives Howden the room to consider a US retail strategy.
The benefits for TigerRisk
The Rod Fox-led reinsurance broker has expanded rapidly since its 2008 launch, with particular success in the US. Its 2011 London launch and 2019 appointment of former MS Amlin reinsurance head James Few signalled the company’s ambitions to push into the international reinsurance space, where it remains underweight compared to the US book.
Becoming part of Howden, whose core strategy has been to amass a network of retail operations across Europe, the Middle East, Asia, Africa, Latin America and Asia Pacific, would give TigerRisk exposure to a flow of retail business that could then be leveraged to help build out its international reinsurance book.
It is also fair to imagine that TigerRisk would be a comfortable cultural fit within Howden – and culture can be the make or break of any tie-up. Both businesses place huge emphasis on entrepreneurialism, innovation and agility. Both are led by CEOs known for their dynamism and charisma. On the flipside, it is more difficult to imagine TigerRisk fitting well into some other large, process-heavy and corporate broking businesses.
Further, given its unusual ownership structure comprising long-term institutional and private equity investors and a 35% employee-owner holding, Howden can be viewed as a strategic buyer that is looking to integrate businesses into its operations for the long-term.
At the same time, Howden would give TigerRisk a parent with a large balance sheet to invest in growth. Its employee-ownership model, which disperses equity among a meaningful proportion of staff, could also be attractive in terms of retaining TigerRisk talent post-deal.
In sum, then, the potential for a long-term home within a culturally similar business may prove a positive development for TigerRisk, as well as solving the problem of where in the reinsurance broking landscape a business like TigerRisk could fit.
What Flexpoint gets
Flexpoint Ford closed its investment in TigerRisk in August 2020, in a deal in which sources had indicated a $35mn Ebitda and a target valuation within the $400mn-$500mn range. Taking $450mn as a midpoint, that would indicate a deal multiple of just under 13x Ebitda.
Two years is an unusually short investment horizon for a private equity house, but Flexpoint Ford may have options here.
First, if it is to exit TigerRisk entirely, it is still selling the asset after a roughly 60% increase in the company’s revenues (leaping from around $125mn in 2020 to $200mn or more this year).
At the same time, Ebitda multiples for high-quality broking businesses have only increased over the past two years – and Howden has already demonstrated its willingness to pay top multiples in this environment, with the full 17x-18x multiple in the Aston Lark acquisition signed last year.
As our scenario analysis below shows, at a 17x Ebitda multiple, Flexpoint Ford could achieve a valuation of between roughly $850mn and $1.15bn for TigerRisk, depending on the broker’s revenues and margins – a doubling of the initial 2020 investment.
If, alternatively, the deal was structured to allow Flexpoint Ford to roll part or all its investment into Howden, the private equity house stands to gain future exposure to a vast broking business that has created astonishing value, particularly in the past decade.
Between 2013 and 2017, Howden’s valuation leapt from £250mn ($311mn) to $2.5bn and, in 2020, was valued at $5bn following its Hg deal. Now the company is believed to be worth more than $10bn based on a recent re-cap with its existing backers.
The addition of Aston Lark as well as a host of smaller acquisitions since that date point to further value creation – a prime opportunity for Flexpoint Ford and Howden’s other backers General Atlantic, CDPQ and Hg.
A deal would also give Flexpoint Ford a rare chance to invest in Howden. There has been no process in which private equity houses could compete to invest in Howden since it brought CDPQ on board in 2017.
What it means for the market
As this publication has explored in detail before, consolidation in the reinsurance broking space has created a market dominated by three giants – Aon, Guy Carpenter and now Gallagher Re – and a gap in the $200mn-$400mn revenue space that JLT once occupied.
There are limited significant consolidation opportunities in the market for reinsurance businesses looking to grow into that mid-tier space. TigerRisk is at present the largest independent reinsurance broker (although BMS has grown its Ebitda to more than $100mn, it deals in a variety of classes and not just reinsurance).
It is conceivable that some players may have been looking for just such an acquisition.
WTW, for instance, following the forced sale of Willis Re to AJ Gallagher after its collapsed Aon deal, may have wished to re-enter the reinsurance market once its non-compete restrictions in reinsurance with Gallagher expire in autumn 2023.
Should TigerRisk become part of Howden, it will remove a significant consolidation opportunity for any other players looking to scale up quickly and inorganically in reinsurance.
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