AJG gets “fundamentally profitable” analytics & ILS with Willis Re: KBW

In commenting on the news that Arthur J. Gallagher (Gallagher) has agreed to acquire the majority of reinsurance broker Willis Re, analysts at KBW highlighted the immediately profitable additions of specialist service units covering analytics and insurance-linked securities (ILS).

It was announced Friday that Arthur J. Gallagher & Co. had agreed to pay $3.25 billion upfront, with a potential additional consideration of $750 million subject to certain third-year revenue targets, to acquire the treaty reinsurance brokerage operations of Willis Towers Watson’s Willis Re unit.

As we explained later that day, the acquisition includes the Willis Re Securities unit, a specialist team with expertise and a track-record in catastrophe bond or insurance-linked securities (ILS) structuring, arranging and sales to investors, as well as other capital market skills.

The acquisition includes a range of other specialist skill-sets that will augment the Gallagher Re reinsurance operation, as well as contributing more broadly across the AJG group.

Analysts at KBW highlighted the “strong analytical tools and extensive capabilities” that Gallagher will also acquire along with the reinsurance treaty broking operations of Willis Re.

These include specialist areas such as catastrophe modelling, rating agency analysis, capital modelling expertise and of course the insurance-linked securities (ILS) operations.

These skill-sets can drive significant fee income and complement the reinsurance brokerage fee cycle.

Of course, AJG has its own expertise in some of these areas, but the Willis Re analytics and catastrophe modelling team has always been considered a particularly strong area of its overall client service and a driver of value.

KBW’s analysts note that these specialist skill areas of the acquisition, including ILS, are already, “fundamentally profitable on their own.”

The analysts also noted that these specialist areas should also drive cross-sell opportunities and new business opportunities over-time for Gallagher.

“In many cases, AJG’s familiarity with the risks placed with primary insurance companies positions it well to design these insurers’ reinsurance programs,” the analysts explained.

With these added value service areas, Gallagher will be able to offer clients along the market chain a range of services that can help to make relationships more sticky, while also having deeper insight into the reinsurance tier of the market, as well as ILS and capital market options for risk transfer.

There is an increasing reliance on brokers for insights into both risk and the risk marketplace, service areas which the acquisition of Willis Re will significantly strengthen for the AJG group as a whole.

Adding the ability to service clients capital market and ILS structuring needs, as well as provision of deeper insights through analytics and modelling, can only help Gallagher as it looks to turn the acquisition into a growth driver, rather than being solely margin focused.

KBW’s analysts said they are confident that as an owner, AJG can stabilise the outflow of talent from Willis Re and build value, while reinvigorating its client and employee bases.

However, the analysts did warn that the revenue leakage from losses of Willis Re staff and teams over the last year could take another two to three years to play out.

But the synergies and additional revenue opportunities possible from the acquired specialist areas of Willis Re can help to soften that blow, while Gallagher Re organises its now much larger business and brings the Willis Re teams into the AJG fold.

As we explained previously, this acquisition of Willis Re is expected to provide Gallagher (AJG) with significant synergistic opportunities in the insurance-linked securities (ILS) market.