29 October 2014 Insurance

New formations and more M&A forecast for brokers

In the wake of the news that Willis and Miller are in advanced talks to merge certain operations, two senior executives at JLT Re have forecast a lot more consolidation ahead for brokers globally.

Speaking to PCI Today, David Flandro, global head of strategic advisory at JLT Re US and Keith Harrison, chief executive officer of UK and Europe, said that further mergers and acquisitions (M&A) activity is now inevitable, resulting in new formations.

“Both the market cycle and the continual demand for resource and analytics that’s based on insurance and reinsurance brokers are becoming a lot more difficult. That means consolidation is very likely,” said Harrison.

“That said, there is also an opportunity for some of the bigger brokers to branch out and start their own operations—particularly in niche areas. While I think there will be continued M&A, at the same time, there will be new formations. It’s an evolving cycle.”

Flandro echoed Harrison, but he also argued that JLT Re now has a unique position within the market thanks to its diverse revenue streams and potential for growth in many areas.

“One of the nice things about JLT Re is that we’re London-based but have a strong global presence—in Asia-Pac, Latin America, and North America, especially after the Towers acquisition,” he said.

“Yes, we are smaller, but we have a global reach and a now also a very distinct regional view everywhere, so we want to use these advantages to provide ideas, solutions and a point of view that doesn’t currently exist in the sector,” he said.

“It’s also good to have a diverse revenue stream, and not to be overly reliant on property-catastrophe reinsurance with market conditions as they are.”

Flandro added: “When I look at my project list for the advisory side, it is truly global, which is very exciting. There’s a tendency for brokers to segment clients regionally, but we’re small and nimble enough to work through these as one big unit, gaining insight from team members all over the world. I have really enjoyed the global collaboration at JLT Re.”

Strategic focus

Harrison spoke of JLT Re’s strategic focus. He said that the broker is looking for growth within the specialty market, both insurance and reinsurance, and has also invested heavily—some $80 million over two years—on insurance specialty lines in the US.

“It’s incredibly difficult to start a new business at the moment, so it’s not just Miller and Willis that we’ve seen recently, there are others that are seeking access to more capital and resource,” he said.

Speaking of the Towers acquisition, Harrison added that, for JLT, one of the main strategic reasons for the deal was the US business, which has given the company brand recognition in the region.

“JLT was previously light on brand recognition in the US, so that’s a great benefit. It also led to the JLT move into the insurance specialty space in the US,” he said.

“Towers may have been a viable ‘number four’ in the US previously, but what the acquisition has done is create a viable ‘number four’ globally.”

Harrison also reflected on the Aon-Benfield merger, saying that the space left behind by Benfield has never really been filled. Alone, neither JLT nor Towers were large enough to take that space, he said. Combined, however, he believes that they can.

Speaking of the annual PCI meeting, Harrison said that a continued talking point is the need for reinsurers and brokers to think outside the box, which he said is healthy for the business.

Flandro added: “I’ve heard several people describe this renewal as Groundhog Day, but it’s not: things are changing. There are very clear differences from last year. For example, the way in which the third party capital is entering the sector is changing, as is the way it’s being utilised.

“Capital is being deployed to greater client advantage with new ideas and creative solutions that were not always possible last year.

“Everyone keeps releasing short-tail and reinsurance reserves, but as this is happening, we’re getting enquires about adverse development covers and loss portfolio transfers. The question that everyone is asking is ‘where are we, really, in the reserving cycle?’.”

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