Inside the fight for fourth place in the broker race

Guy Carpenter’s absorption of JLT Re has triggered an intensification of the battle for the $4.5bn reinsurance broking market, with the rise of a new challenger broker in Lockton Re and a resultant bidding war for talent.

The number two reinsurance broker’s acquisition of the number four player created the world’s largest reinsurance broker with pro forma revenues of $1.6bn, although essentially in line with previous market leader Aon.

Attention has focused on the talent exodus from the enlarged Guy Carpenter, with the shock departure of North America CEO Tim Gardner to Lockton Re followed by a string of less surprising exits of former JLT Re staff, some voluntary and some forced.

But the big picture here is the further concentration of reinsurance within an oligopoly, with the big three’s market share now estimated at 85-90 percent, and the rest nowhere close.

We believe this bifurcation between the big three and the rest will continue, with the leverage provided by controlling the largest retail broking operations and the ability to fund the analytics arms race giving them an unassailable advantage.

As such, it seems unlikely that any challenger will be able to reclaim the Tier 2 status JLT Re had as a $300mn player, and if they do it will require massive upfront investment and 10 years of patience.

The Insurance Insider’s key takeaways are:

  • Lockton Re – The firm will have to overcome huge obstacles to hit its $400mn revenue target at maturity, including the difficulty of harnessing its $6bn-$10bn-premium US retail book given its non-corporate model and the challenge of competing for major clients given its analytics underspend versus the big three.
  • Guy Carpenter – The broker looks set to underperform for 12-24 months on organic growth and will have to live with negative news flow around departures, but with a 1,500-basis point margin gap between Guy Carpenter and legacy JLT Re it will be able to drive big earnings growth even if revenues fall.
  • Aon/Willis Re – Neither has hired prominent names from Guy Carpenter/JLT Re, but they are likely to be the biggest winners in dollar terms from the recalibration as cedants look to curb concentration with one broker.
  • Boutiques – There is clearly room for boutique brokers of different models to succeed in the $50mn-$150mn revenue bracket, with TigerRisk Partners the standout candidate, but Capsicum Re on the eve of its sale to AJ Gallagher, BMS Re and Beach – now part of US retailer Acrisure – are also growing profitably.
  • McGill & Partners – Steve McGill has said the start-up will look to build a presence within treaty and facultative reinsurance, but hiring in this area has been minimal to date with primary lines the focus and his model in this area is not yet clear.

Guy Carpenter

When Marsh & McLennan Companies (MMC) acquired JLT for £4.9bn ($6.0bn) in a deal largely motivated by the insurance business, it also picked up fast-growing number four reinsurance broker JLT Re.

The deal made Guy Carpenter the biggest reinsurance broker by a narrow margin, although this could prove to be short-lived given H1 revenue performance.

While the London market specialty businesses were effectively merged, with the business renamed and the leadership team comprising talent from both camps, in reinsurance Guy Carpenter essentially absorbed JLT Re.

Exits from the JLT Re top team – for various reasons – have included CEO Mike Reynolds, chairman Ross Howard, CFO Nick Moss, North America deputy CEO Pete Chandler, and UK and Europe CEO Keith Harrison.

Revenue leakage is likely, particularly with the $20mn-$30mn former Towers Re London business attached to Harrison and Howard, but sources have said that the old JLT Re cost base could be halved. However, Guy Carpenter’s positive margin gap over JLT Re means simply running the cost base more efficiently will buoy earnings.

Rather than the smaller challenger brokers, Aon and Willis Re – as the closest parallels to Guy Carpenter – are best placed to benefit from clients that worked with JLT Re and Guy Carpenter who feel they now have excessive concentration with a single broker.

Lockton Re

In March, US retailer Lockton signalled an aggressive expansion of its small reinsurance arm by hiring Guy Carpenter’s North America CEO Gardner, along with global innovation chief Claude Yoder and managing director Nick Durant.

Confirming the hires the day after they were reported by this publication, CEO Ron Lockton said the company was “going all in on reinsurance”, describing it as “a critical pillar of Lockton’s aggressive growth plan”.

The Insurance Insider can reveal that Lockton has talked about building a $400mn-revenue reinsurance broking business at maturity.

Sources who had been briefed on the plan said Lockton Re intends to go up against the big three brokers and will target a broad book of business including large accounts.

Gardner is considered a highly credible leader, and is extremely close to AIG, one of Guy Carpenter’s largest clients, while the old Towers Re London book is among the stickiest in the market.

However, the revamped Lockton Re has had a vexed start, with a lawsuit from Guy Carpenter involving a temporary restraining order against Gardner.

The firm’s approach to remuneration has also raised eyebrows, with reinsurance broking sources telling this publication they were aware of staff offered upwards of double their compensation to join, including three-year guaranteed bonuses.

One senior source said the Lockton plan showed the business making a loss beyond year five, reflecting the front-loading of costs, the accounting within reinsurance broking and the long sales cycle.

Lockton has an estimated $6bn-$10bn US retail book that rivals and cedants expect it will look to leverage to secure a share of outwards programmes. However, in looking to leverage this book within the US, it will face rivals with much bigger retail platforms.

In addition, Lockton faces an uphill struggle in establishing the kind of centralised placement guidelines and structures that are possible within more centrally controlled and corporate broking environments.

Lockton will also come up against the challenge of having to compete with reinsurance brokers that have the scale to fund much larger investments in analytics and which can utilise bigger stores of data.

As reinsurance brokers continue to move away from providing transactional and placement services towards higher-end advisory work around capital and risk management, the benefits of scale are only likely to grow.

TigerRisk

There is clear room for smaller reinsurance brokers looking to attract staff who want a more entrepreneurial environment.

That driver looks likely to persist long term, although it is hard to see that these firms – particularly if they lack a major retail broking platform – can get much beyond $100mn of revenues.

TigerRisk is the prime example of this model, and is believed to have grown revenues to around $100mn after just over a decade in business. The firm’s success has been driven by a culture of aggressive client advocacy, a number of highly lucrative personal relationships held by star players, and a bespoke approach that has given it a niche in large one-off deals.

One buying source said TigerRisk’s more tailored approach and innovative thinking contrasted with bigger brokers, which sometimes appeared to be offering choices from a menu.

Recent hiring activity – which has included president Rob Bredahl, new London CEO James Few, senior Willis Re broker Lindsey Frase, JLT Re binders broker Neill Cotton and former Lloyds Bank executive Bill Cooper – has reignited speculation about an imminent liquidity event.

However, sources have said that it could be difficult for TigerRisk’s equity holders to secure full franchise value on an exit given the high degree of concentration of revenues with Tower Hill and Farmers (where personal relationships play a major role in production), and with as much as 20 percent of revenues believed to be driven by one-off deals. Some see it as more of a partnership business – not that such businesses cannot find deal structures and the right counterparties under certain circumstances.

TigerRisk has been the most prominent in this tier given its lead on scale, but BMS – fresh from its buy-in from Canadian pension fund British Columbia Investment Management – has also signalled its intention to establish its credentials as an alternative to the big three.

Capsicum Re, meanwhile, has grown rapidly from a standing start in 2013 and looks set to be acquired by AJ Gallagher over the next two or three months.

Beach, with around $50mn-$60mn of revenues, has targeted growth among smaller clients in the US where its owner Acrisure has a major presence as a retailer.

RKH, which has been heavily geared towards facultative business to date, has also quietly added a number of new treaty specialists in a bid to secure growth.