The recent announcement that Willis Towers Watson has rebranded as WTW highlighted the scale of mergers and acquisitions (M&As) in the insurance sector over the last few decades. The rebranding sees the Willis name disappear from the group after nearly 200 years. It began as Henry Willis & Co, became Willis Faber, and then Willis Faber & Dumas. It joined with a US broker to become Willis Corroon, then merged with Towers Watson.
The number of major global players in the insurance market, insurers and brokers has been shrinking as M&As bring players together in order to create huge global businesses. Even when there were just a handful of global brokers, it didn’t stop Marsh acquiring JLT. And then, Aon attempted to merge with Willis, which would have left just two truly global brokers.
And we all know how that ended.
Since then, WTW has suggested that it is looking at smaller bolt-on deals rather than large-scale ones, and Gallagher continues to pick up smaller brokers at a rapid rate. So the question is: are the big deals over in the insurance sector? Are we now likely to see smaller bolt-on deals rather than mega-mergers?
End of mega deals?
Bruce Ballentine, vice-president – senior credit officer at Moody’s in New York, points out that the attempted merger between Aon and WTW was “uniquely large and challenging from a regulatory perspective”, attempting to combine the second- and third-largest global insurance brokers to form the largest broker in terms of revenue, at least before related divestitures. But the deal met regulatory resistance, particularly in the US, and was terminated. However, Ballentine adds: “There are still ample opportunities for mergers, acquisitions and divestitures among insurance brokers and among (re)insurance carriers.”
Ken Johnson, managing director, AM Best, says the big deals are not necessarily over but he would still expect to see more in the medium- to small-size markets, driven by things like capital and innovation needs. “However, in both the broker market and insurance industry, there are many medium- to small-size companies that could potentially benefit from scale achieved through consolidation. Some brokers/insurers have done several bolt-on deals, which allows them to develop an expertise in identifying and closing additional transactions and helps increase the success rate,” he says.
For brokers in particular, big deals involving market leaders have become increasingly difficult because of antitrust concerns, says Robert Mazzuoli, a director in the insurance team at Fitch Ratings. And he notes that in the reinsurance sector, “mergers involving two large-cap reinsurers are considered as value-destructive, as cedants would seek to then distribute business away from the merged entity because of increased counterparty risk”.
Limited reinsurance consolidation
On the reinsurance side, Carlos Wong-Fupuy, senior director, AM Best, points out that with the top ten global reinsurers already representing more than two thirds of the market by gross written premium, there is limited room for further consolidation. He says that despite the sustained increase in dedicated capital in the global reinsurance industry, Best does not see appetite for major M&A transactions at the moment.
“This may reflect prior periods of acquisitions with yet uncertain or mixed results, compounded by insufficiently attractive levels of price to book value for reinsurers. Nevertheless, a number of reinsurance groups have been trying to diversify their business away from property natural catastrophe risks and into either what is perceived as attractively priced lines in the primary sector – in particular excess and surplus lines – or new geographic territories. In general, these tend to be ventures of a medium to small size, for which new startups are set up or shell companies are redeployed,” Wong-Fupuy says.
Mazzuoli notes that bolt-on acquisitions that add niches (line of business, geography, client group, distribution channel) are always a possibility for market-leading companies, but are more likely to happen in times of distress as valuations drop. And on the life side, he believes the market may continue to see larger deals as private equity and other asset managers see opportunities to leverage their expertise in matching up with long-term liabilities.
Room for more?
So, as far as big brokers and re/insurers are concerned, have we reached peak size?
“It’s a fair comment that we may have peaked on the larger deals,” says Best’s Johnson. “These deals are not easy to execute and often get hung up over valuation. From a financing standpoint, however, it is still a favourable market with high equity prices acting as a strong currency, along with still historically low debt costs. However, for the large deals, getting one plus one to equal three has still been somewhat elusive.”
Moody’s’ Ballentine says the merger/acquisition/divestiture story is different for brokers than for (re)insurance carriers. He notes that insurance brokerage for middle-market clients is highly fragmented, especially in the US, which has about 30,000 insurance brokers and agents. “There are hundreds of acquisitions per year in this space, a majority of which are PE-backed consolidators purchasing small to mid-size brokers. The consolidators and their targets seek advantages of scale to allow for more IT spending, greater clout with carriers, and access to more industry and product specialties,” he says.
Ballentine explains that transactions are more scarce and more varied among (re)insurance carriers, with companies finetuning their product offerings and geographic footprints, sometimes adding and sometimes shedding components.
So where is consolidation and mergers taking place? It would appear to be largely among those serving the middle market. So M&A is more about staying local and regional, rather than trying to join the big global players.
“There is still a strong reason to remain regional/local,” says Best’s Johnson. “Many insurers have built strong regional brands over the years and feel somewhat integrated into their local markets. Penetrating the middle and underserved markets may require that local feel. The issue is that even at this local level, those regional companies will have to make refinements in their approach to the customer in order to stay competitive in the long run, which may require M&A or partnerships with other providers.”
Fitch’s Mazzuoli says the market may see other examples of the recent Covéa/Partner Re combination as insurance companies seek to diversify their portfolios and grow outside of their existing markets. And he notes that Bermuda sector consolidation continues, with a recent focus on hedge fund reinsurers. Going forward, he says M&A deals are likely to be more limited, given the reduced number of Bermuda market companies currently looking to consolidate.
The state of the market can be a factor in M&As according to some analysts, and the current hard market, perhaps having reached its peak, is having an impact, according to Brian Schneider, a senior director in the insurance team at Fitch Ratings: “M&A activity has slowed as the hardening market conditions have put more focus on organic growth. However, to the extent that market firming does not benefit all players, those that are unable to take advantage of current opportunities will be more vulnerable to take over when the market inevitably turns soft again, perhaps as early as 2023.”
Best’s Johnson agrees that the state of the market does impact M&A. “Hard markets attract capital as we’ve seen with the private equity investors,” he says. “This can run for a few years until competition tempers the pricing attraction. Scale through M&A is one way to remain competitive, as you can cover your costs and then continue to offer competitive pricing. However, innovation has added a new dimension to operating efficiently, and can allow a medium-sized player to remain competitive longer, but it also attracts many newcomers as well.”
However, Moody’s’ Ballentine does not think insurance pricing cycles have a big impact on insurance-related M&As, noting that purchasers tend to look through these cycles when pursuing acquisitions. But, on a different market/economic matter, he adds: “We have heard from US broker consolidators that potential increases in US capital gains taxes have helped accelerate some transactions into a given tax year, but this is not the main driver of deal activity.”