Late last month, rumours swirled in the market that 49 reinsurance brokers had resigned to join a WTW reinsurance start-up.
For a couple of days the market frantically scrambled for information. Some thought the resignations were from Aon, others said Howden. McGill, BMS and Gallagher Re were each flagged as raided. Or a combination of the above.
Nobody had any names, and the rumour crumbled to dust that blew away on the wind. A bonus-season ghost.
Regardless, this was the first anyone had heard about the prospects of a Willis Re-boot in some time, and it refocused the market’s attention on the idea.
Having first reported on internal work to gauge a possible re-entry to reinsurance in July, which group CEO Carl Hess subsequently confirmed, this publication revealed in November that WTW was working with an executive search firm to map talent.
It is not clear where WTW’s leadership stands on pulling the trigger on the project, and with its new broking chief Lucy Clarke only three months away from joining, some believe decisions like this will be pushed out.
Hess, Clarke and co should shelve the project and focus their attentions elsewhere.
Hollywood studios like reboots because they think there is less risk in developing films with established IP. The same reduced risk profile is not true for a Willis Re-boot three years after its parent sold that business to AJ Gallagher for $3.25bn. Indeed, it is really quite a risky gambit.
There are five reasons WTW should look for other areas to drive growth.
1. A Willis Re-boot would be a cash sink, with very slow payback for a business trying to rehabilitate its reputation with public investor
Sources have estimated the cash burn for a full-service reinsurance broker start-up at $150mn if it is executed well. Given WTW was scoping out the prospects for London specialty plus US P&C with a mid-market orientation, it is possible you could trim this number – but even if it were $100mn, that’s a big upfront investment for a business with $1.2bn of trailing cashflow.
For a business that needs to show results now to burnish its reputation with public investors and secure a market rating, a five-year project to get to profitability and seven years plus to hit good margins is surely overreach.
2. Reinsurance broking has a dearth of strong, proven leaders, and those it has would likely be unwilling to take on a fresh start-up
A number of factors have inhibited the creation – or restricted the availability – of a large cadre of reinsurance executives capable of leading a start-up successfully.
The creation or scale-up of the challenger brokers has drawn in some of the best available talent, such as Tim Gardner at Lockton Re, or Tim Ronda moving to TigerRisk (now Howden Re). Other proven leaders have left the market, with Gallagher’s James Kent retiring.
The reinsurance broking sector has a demographic challenge, with many of its key leaders in their mid-50s or above, and a widespread belief there is a missing generation below. Some sources believe the amount of client work that senior reinsurance broking executives do inhibits the development of operational leadership skills.
The scale of the challenge around senior leaders is illustrated by Aon Re – the world’s biggest reinsurance broker – not appointing a CEO for Reinsurance Solutions almost 12 months after Andy Marcell started dual-hatting that role and the position of Commercial Risk CEO.
WTW would also face the additional challenge of the cost of all talent being bid up through the Challenger Wars and the recent hard market.
3. The last couple of years have been cyclically great for growing reinsurance broking businesses, but the tailwinds are lessening
A number of the challenger reinsurance brokers have been able to put up 20%+ organic growth through 2023 as they benefited from rate rises and some additional limit purchasing.
Overall, market conditions have been reasonably supportive since 2019, albeit with an intensification over the last 18 months. Cedants have also been keen to feed the new mouths as they felt their distribution had become too concentrated with three names controlling more than 80% of the brokered market.
If you are getting up and running in the second half of 2024, market tailwinds are going to lessen and move into reverse while you are still in the early stages of your buildout.
4. Broking start-ups that look to start production from zero dollars of revenue do not work as well as “buy and build” strategies – but there is nothing to buy
It is incredibly difficult to get brokers off the ground when you have to build organically from no revenues.
A better model for start-ups is to acquire and then add new teams and platforms around what is bought.
Reinsurance broking presents very limited buying opportunities, and nothing that is scaled.
Market chatter that WTW could look to buy a business such as BMS (last valuation £1.75bn) as a means of acquiring its reinsurance broking arm seems outlandish. McGill and Partners lacks treaty operations of scale. Inver Re would be hard to prise away from the rest of Ardonagh Specialty. Holborn is not for sale.
5. Housing an entrepreneurial start-up in a large corporate is culturally difficult to get right
For WTW to stand a shot of making this work from a talent-acquisition perspective, the obvious approach would be to try to establish a Capsicum-type structure.
Here WTW would own a majority of the equity, with management and production talent granted significant equity in the business on joining. WTW would then have a mechanism for buying out staff equity holders on a pre-agreed timetable and formula.
This could put WTW in a position to challenge firms that have big equity packages to offer, or true market-leading positions, capabilities and connections.
However, the bar to execute something like this is incredibly high. Large corporates typically don’t like granting entrepreneurs the degree of freedom they want to build a business. Defections post-liquidity-event are highly likely, and existing staff can be upset by the preferential comp structure offered to the start-up staff.
Capsicum just about made this work, but it had proven entrepreneurial reinsurance broking leadership, and was housed within a more entrepreneurial and broking-focused firm.
A long and narrow path to success
None of this undermines the argument that WTW would be a more valuable and effective enterprise if it had a scaled reinsurance broking arm.
Reinsurance brokers fit nicely with retail brokers because of (whisper it) inwards-outwards leverage. They also operate as little R&D engines and centers of excellence that can make the broader business better.
But the path to creating such a business is long, narrow, and punctuated by landmines. WTW was right to look at the option, but it should pass.
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