While Gallagher’s CEO went to some lengths to explain that the acquisition of a $3.57 billion merger remedy package from Aon and Willis Towers Watson (WTW) is focused on growth rather than synergies, the deal will bring the firm significant synergistic opportunities in the insurance-linked securities (ILS) market.
It was announced yesterday that Aon and Willis Towers Watson (WTW) had reached agreement with Arthur J. Gallagher & Co. (Gallagher) for the sale of a package of WTW assets valued at $3.57 billion, including reinsurance broking arm Willis Re.
J. Patrick (Pat) Gallagher, Jr., Chairman, President and CEO of AJG, focused on the growth this deal provides for his firm, saying “This acquisition will accelerate our long-term strategy by significantly expanding our global value proposition in reinsurance, broadening our retail brokerage footprint and strengthening key niches and specialty brokerage offerings.”
Often, synergies are touted in relation to mergers and acquisitions (M&A), which is always taken to mean expense synergies and related to cost-savings.
Pat Gallagher was keen to drive home the fact these acquisitions are more growth related, even saying during an analyst call yesterday that, “You’ll notice that there’s no dollar synergy amount in our announcement. This is not a synergy play. This is not an expense take-out play. We’ll invest in these businesses and grow them.”
But synergies are not just cost-related, as the real meaning is that the combined value and performance of two entities can be greater than the sum of the product of their individual components.
When it comes to AJG as an organisation, Gallagher Re as its growing reinsurance startup, plus Willis Re as a top-three global reinsurance player, there are definite synergies available to Gallagher.
In particular, we’d suggest that Gallagher, once Willis Re is embedded, will have a significant opportunity to increase its status in the insurance-linked securities (ILS) market.
In fact, the company said yesterday that the additional reinsurance scale will allow it to “leverage Gallagher’s industry-leading alternative risk and ILS business.”
As a reminder, Gallagher already owns Artex Risk Solutions, a specialist in captive and alternative risk transfer solutions, as well as in insurance-linked securities (ILS) market facilitation and management.
Artex acquired significant ILS market facilitation player Horseshoe in late 2019, the Bermuda-headquartered specialist ILS, insurance or reinsurance management and fund administration, servicing, and risk transformation specialist.
Horseshoe and Artex together have a significant piece of the insurance-linked securities (ILS) market’s transactional throughput going through their various structures and service-offerings, from insurance and reinsurance management, structuring, managing and administering vehicles to house ILS arrangements, operating transformers, transaction servicing, to ILS fund administration.
Now, as we explained yesterday, Gallagher is also adding its own broker-dealer with ILS, catastrophe bond and capital market expertise, in the Willis Re Securities unit that comes as part of the deal.
Willis Re Securities brings expertise in structuring and bookrunning of catastrophe bonds and other collateralized reinsurance arrangements, as well as the ability to trade derivatives and other capital market instruments, with operations and teams in the US and UK.
This means Gallagher now has a full-service offering for arranging, structuring and selling catastrophe bond and ILS issuances, as well as servicing, administration and management of ILS structures and transactions, from its Horseshoe, Artex and Willis Re Securities teams.
Becoming a global top-three reinsurance broker as well means that Gallagher also has the pipeline and the ability to drive more deal-flow into its ILS businesses, as well as the ability to offer a truly capital agnostic service offering to clients, plus the ability to house the majority of ILS issuance and management related services they need under a single umbrella.
The synergies don’t stop there though, when it comes to the use of the capital markets and ILS capacity for risk transfer, as Gallagher is also expanding its commercial insurance offering and facultative business, two areas that can also find the capital markets and ILS funds as willing recipients of their risk.
With a significant captive management operation at Artex as well, there are other clear synergies in helping large corporate risk transfer buyers to access new forms of capital, with the help of Horseshoe and the future Gallagher Re Securities team (as they might be called).
So while we understand the desire to shy away from suggesting the WTW acquisitions are expense synergy focused, Gallagher shouldn’t shy away from advertising the significant synergistic gains that it could make by embracing its ILS and capital markets related service offerings and alternative risk transfer, to provide its clients with a true capital agnostic approach and all the structuring and servicing support they need to make best use of this.