With the $30 billion Aon-Willis Towers Watson merger on Monday, bigger continues to be better in the insurance agent-broker M&A marketplace.
The industry has seen an uptick in consolidation over the last few years, with the latest transaction involving two of the world’s largest insurance brokerages combining to create the world’s largest commercial insurance broker. M&A activity in the space has been driven primarily by the expanded role of private-equity and other financial institution backed buyers.
The merger may result in concerns among carriers as the second and third largest brokerages have combined to create one giant player, says Timothy Cunningham, managing director at Optis Partners. Concerns may spring up over the concentration of the business, volume and clients that they leverage to receive better commissions and overrides.
“This industry trend toward consolidation lends proof that the status quo and the inefficiencies in the current distribution model demand change given the need to scale to address falling margins,” says Le Phan, CEO of Strategic Benefits Solutions. “Hopefully it is a wake-up call to brokers and advisers to change their strategies to better address the evolving demands in our marketplace.”
The combination of Aon and Willis Towers Watson will be a formidable rival for Marsh & McLennan, which had been the top name in that sector in terms of revenue. The Aon and Willis Towers Watson deal comes one year after Marsh & McLennan purchased Jardine Lloyd Thompson for $5.6 billion.
“When you combine the two big players in that space it’s going to be very exciting to see what they can do, especially since they appear to be really focusing on innovation,” says Judith Wethall, an employee benefits focused lawyer with the firm McDermott Will and Emery.
Insurance dealmakers announced $12.5 billion in transactions during the fourth quarter of 2019, according to PwC data, this was the strongest quarterly total in nearly two years. However, the annual total for 2019 was $19.9 billion, only 51% of the record set in 2018. PwC expects steady M&A activity for 2020, which will be driven by greater levels of deployable capital among private equity and corporate buyers.
Indeed, in January private equity firm Thomas H. Lee Partners acquired a majority stake in AmeriLife, a life and health insurance and annuity distributor. That deal was worth over $1 billion, according to PwC.
“The industry will continue to see a steady stream of consolidation,” says Derek Winn, an adviser with Business Benefits Group. “One of the issues for those firms that grow primarily with M&A activity is that sustainable growth is harder to come by without continued M&A activity.”
However, these changes can create opportunities for the market, Winn says.
“We steadily acquire new clients because they no longer see the time and attention from their prior broker following consolidation,” he adds. “For their clients, it may not be disruptive at first, but give it time. Will the bottom 50% of Willis’s book receive the same attention they saw under a firm that’s now twice the size? Similarly, what about Aon’s bottom 50%? Time will tell, but we’ll be ready in our market.”
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The all stock deal between Aon and Wills Towers Watson — which is expected to close in the first half of next year — is the largest ever for the industry. The companies have a combined equity value of $80 billion.
“When you combine two mega powers of consulting and insurance in the employee benefits space you would hope that something really innovative can come out of this merger,” Wethall says. “When two powerhouses put their assets and their intellectual property together it would be awesome to find some kind of exciting solution in healthcare on a going forward basis.”
The two companies had been in talks about a merger last year, but nothing came of those discussions at that time. It is possible that with Willis Tower Watson’s weak guidance for 2020, Aon saw a better opportunity for a deal now.
“The industry continues to see consolidation of the behemoths, yet one thing remains true, clients continue to question the value these intermediaries bring to the table,” Phan says. “With the volatility in the marketplace, employers will continue to expect more for their money. Given this, perhaps carriers will be more open to alternate distribution models that provide more value to the employer.”
