If Aon / WTW leads to divestitures, AJG seen as “best fit” for Willis Re: KBW

With the merger of insurance and reinsurance broking giants Aon and Willis Towers Watson (WTW) coming under increased scrutiny from regulators, analysts at KBW suggest that should reinsurance arm Willis Re have to be divested, AJG would be seen as the “best fit” to acquire the WTW unit.

The European Commission (EC) announced in December that it had opened what it calls an “in-depth” investigation of the merger of insurance and reinsurance broking giants Aon and Willis Towers Watson (WTW), citing concerns over the potential impact to competition in some key markets.

The subject of divestitures has been well-covered in relation to Aon’s planned acquisition of WTW.

There is some concern that divestitures, or sales of certain operations, could be required to get the merger deal through under competition laws.

But Aon remains convinced that this won’t be required, with the insurance and reinsurance broker saying in a recent statement that it “remains confident of a positive outcome without any divestitures.”

KBW’s equity analyst team seem less convinced of that and so took a look at one area of the combined business that could come up as contentious and potentially be forced into a divestment.

Reinsurance broking.

The subject of WTW’s reinsurance broking arm Willis Re and how that entity combined with Aon’s Reinsurance Solutions may tip the regulators in favour of forcing divestitures, is a key area of the business that is likely to come into focus as the impeding deal is analysed.

With reinsurance broking dominated by Aon, WTW and Marsh’s Guy Carpenter, between them holding around 90% of the reinsurance broking market’s premiums, reducing that to just two dominant players commanding the majority of the reinsurance landscape globally may be too much for competition focused regulators to allow.

While Aon’s preference is assumed to be the acquisition of all of WTW, including the Willis Re reinsurance arm, KBW’s analysts note that this “represents a reasonable required divestiture,” given the competition and potential market dominance issues.

Reinsurance broking is “already enormously concentrated” KBW’s analyst team explained, but they do think that a sale of Willis Re could be accretive to the combined entity.

In fact, they estimate that a sale of Willis Re could command a price as high as 13 times 2022 Ebitda, a year for which the analysts model Willis Re as having revenues as high as $1.1 billion.

This is above typical deal multiples, KBW’s analysts explain, but this is “reflecting the scarcity value of established global reinsurance brokerages balanced against the relatively limited pool of buyers and the “forced” nature of this potential divestiture,” they say.

Out of the potential acquirers, of which there would likely be a few, KBW’s analysts believe that Arthur J. Gallagher (AJG) would be the most likely candidate.

AJG looks like the “best fit”, KBW says, with this opinion “reflecting its existing size and international footprint on the one hand, and its already-successful re-entry into reinsurance brokerage, beginning with a joint venture in 2013 on the other.”

AJG recently renamed its reinsurance broking joint-venture arm Gallagher Re as it took 100% ownership in the entity.

Adding Willis Re to Gallagher Re would boost AJG’s reinsurance broking activities significantly and likely provide synergies across the companies other primary and corporate risk broking arms.

In addition, AJG also owns insurance-linked securities (ILS) market facilitator and insurance or fund management and administration experts Horseshoe, which would also have strong synergies with the creation of an enlarged reinsurance broking operation through an acquisition of Willis Re.

“Several other large private-equity backed and privately-held insurance brokers could emerge as bidders,” as well, KBW’s analyst team further explained.

Among these could be the likes of TigerRisk, Lockton, Howden, Beach, BMS, Holborn and maybe Tysers, we’d suggest.

Although, given the current attraction private equity investors have to the reinsurance market, a buy-out by PE investors to establish Willis Re as a stand-alone could also be a possibility.

Summing up on the potential for AJG to expand its reinsurance activities, KBW’s analysts wrote, “If AJG buys Willis Re, we think it could very effectively compete with AON and MMC’s Guy Carpenter within reinsurance brokerage, while strengthening its relationships with – and understanding of – many of the insurance carriers for whom it currently provides primary insurance brokerage.”