Arthur J. Gallagher & Co. has announced that it will be acquiring all of Willis Re’s treaty reinsurance brokerage operations for an initial gross consideration of $3.25 billion; a figure which could rise by another $750 million dependent on certain third-year revenue targets.
After seeing its proposed acquisition of Willis Re and certain other Willis Towers Watson (WTW) assets break down following news that Aon and WTW had decided to terminate their merger, Gallagher has now reached an agreement to purchase some of the reinsurance broker.
Under the terms of the agreement, which includes the treaty reinsurance broking operations of WTW, Gallagher will acquire the combined businesses for an initial consideration of $3.25 billion, although dependent on revenue targets this could reach $4 billion.
For Gallagher, the acquisition is expected to bring numerous benefits, including an expanded global value proposition within reinsurance brokerage.
Additionally, the company will be acquiring a broad suite of analytics capabilities including actuarial services, catastrophe modeling, dynamic financial analysis, rating agency analysis, and capital modeling.
Gallagher also stands to benefit from the addition of a talented management team; increased product breadth and offerings; further leveraging of its industry-leading alternative risk and insurance-linked securities (ILS) business; and strengthened relationships with major primary insurers.
The company says that it plans to finance the deal using cash on hand, including the $1.4 billion of net cash raised via its May 17th, 2021 follow-on common stock offering, and the $850 million of net cash borrowed via its May 20th, 2021 30-year senior note issuance, short-term borrowings and additional free cash generated before close.
Gallagher expects integration to take approximately three years, with total non-recurring integration costs estimated to be approximately $250 million.
J. Patrick Gallagher, Jr., Chairman, President and Chief Executive Officer (CEO), commented: “Broadening our reinsurance brokerage offerings has been a strategic objective at Gallagher and this acquisition will significantly enhance our global value proposition.
“We were very impressed with the Willis Towers Watson reinsurance professionals we met during our initial due diligence and strongly believe a combination will significantly enhance our offerings to clients and prospects. I look forward to welcoming the 2,200 new colleagues joining us as part of this transaction to our growing Gallagher family of professionals.”
For the entirety of 2020, the operations Gallagher is acquiring from WTW generated around $745 million of estimated pro forma revenue and $265 million of estimated pro forma EBITDAC.
The business operates in 24 countries, places more than $10 billion of premium annually and represents in excess of 750 insurance and reinsurance company clients.
Commenting on the deal, John Haley, CEO of WTW, added: “Following the termination of the proposed combination with Aon, we have been taking time to reflect on what we have learned about WTW over the last 16 months and determine how we will move forward as an independent company. As part of this, we conducted a review of strategic alternatives for Willis Re, our global reinsurance business. While we highly value Willis Re and our colleagues who contribute to its success, we concluded that divestment was the appropriate path for this business and for WTW.
“We are excited about our go forward portfolio of businesses and believe we are well positioned to compete vigorously around the world and make investments to grow organically and inorganically. We are winning new business, bringing the best to our clients and actively engaging and recruiting talent. And, we are going to continue to innovate and adapt to address evolving client needs. We look forward to sharing more about our future plans during our upcoming Investor Day on September 9.”
In the aftermath of the collapse of the Aon and WTW deal and subsequently the initial Gallagher and Willis transaction, analysts suggested that Gallagher could still make a move for its rival.
Under the terms of the initial deal, Gallagher was set to pay $3.57 billion for the whole of Willis Re and certain other WTW assets, which was noted in the market as being a very good price.
However, Gallagher has now agreed to pay an initial fee of $3.25 billion for just the treaty operations of Willis Re and no other WTW assets, which suggests it’s paying more for less.
Speaking during a recent call on the agreement, Gallagher’s Chief Financial Officer (CFO), Douglas Howell, confirmed that this time around, the facultative reinsurance business is staying with WTW, while it has added Hong Kong and China to the mix on the treaty side.
Nevertheless, it’s a huge boost to the reinsurance broking footprint of Gallagher Re, propelling it into third place on the reinsurance broking leaderboards.
The transaction is anticipated to close no later than the end of the first quarter of 2022, subject to regulatory approvals.