Open to M&A: Gallagher Re plots a bullish growth curve

Gallagher Re is open to fueling growth through acquisitions, partnering with the broader Gallagher organization, where it eyes niche, strategic opportunities that will complement its existing footprint, Tom Wakefield, its chief executive, told Monte Carlo Today.

Key points:
Gallagher Re open to M&A
Parent has substantial war chest
Carriers face tough strategic choices 

“We will focus on areas where we see strategic opportunities to build capability.”

The reinsurance broker is growing quickly through organic growth – 20% during Q1, though this slowed to 5% in Q2. But parent Arthur J. Gallagher is estimated still to have approximately $2 billion in M&A capacity remaining in its war chest, even after its recent acquisitions of AssuredPartners and Woodruff Sawyer. Its willingness to use this to grow its reinsurance arm was apparent last week when Gallagher Re bought Australia broker Steadfast Re.

“As part of Gallagher, we have the opportunity to look at mergers and acquisitions,” Wakefield said. “We will focus on areas where we see strategic opportunities to build capability and supplement in territories where we see opportunity for better penetration and scale. We remain extremely ambitious. We’ve generated outsized growth over the last few years and strongly believe we can continue. But the key will be client engagement and how we offer new insights.”

Insights are key

He is referring broadly to investments made in tools able to offer clients better insights and opportunities through analytics and data. “We have invested in tools designed to help clients navigate all the tons of data available and create genuine insights.”

These are becoming increasingly important in current market conditions. A period of higher rates has generated healthy profits, which, in turn, has led to capital levels building in the reinsurance industry. This is now leading to a broad softening of rates, apart from US casualty. But that is now posing a dilemma for reinsurers – how will they use that cash pile? Where are future growth opportunities? For cedants, that also means options and choice. 

Wakefield acknowledges that an abundance of capital can mean some tough strategic questions for many carriers. But he said the answer depends on each individual company’s strategy.

“Supply is outstripping demand in most in most areas, except possibly for North American casualty. Obviously, that means pressure on rates. But it’s never that simple. Each client has a different story; they are at different points in their journey. Each carrier will have had their unique approach over the past two or three years and that leaves them in very different situations. But they are either writing more gross premium, retaining more net premium or both.

“For us, that means we have to differentiate between clients. That could mean re-evaluating reinsurance structures, looking at the use of alternative or third-party capital or other things. Our job is to make sure we create as many options as possible when we connect risk to capital, which is the fundamental role of reinsurance.”

Nevertheless, he acknowledges the conflict in some companies. Underwriters might wish to write more business – and move into new lines of business. The CFO, on the other hand, could have a different view. “They may be concerned about the declining rate environment,” he said. “And if they seek growth outside of core areas, what does that growth look like? Is it going to be better or worse than their existing portfolio? It’s a dilemma.”

He notes that some of the most problematic years for casualty, from 2014 to 2019, are now starting to mature, which means people can begin to move on. “But trying to separate out and clearly articulate the difference between risk already written, which is causing strain through prior reserve development, versus what’s happening now with smaller limits, higher deductibles and higher pricing, is a big part of our job in differentiating what the portfolio performance is going to look like on a go-forward basis.”

Matching the need

For a broker, however, the key is that any reinsurance structure is aligned with the underlying strategy of a client. “Those will vary by client, but when people are thinking about the trade-offs between buying quota share, non-proportional reinsurance, aggregate covers or using alternative capital, there must be a strategy. It must fit with what the client is experiencing in the underlying business.

“That will continue to be our message; we set ourselves up to support clients with that. Our strategic advisory team looks at all sorts of things for growth opportunities, cycle management, loss ratio, picks, and really spends a lot of time supporting clients, analysing own portfolios to help them explain their strategies to reinsurers in a way that lines up to how the reinsurer is assessing risk themselves and the view on risk that they're adopting.”

Gallagher Re has several tools to help with this, including its reinsurance analytics platform, which helps with a range of matters including data enrichment, modeling, pricing and portfolio optimisation, while using machine learning to assist with reinsurance underwriting and risk management.

“But all these tools sit within one ecosystem, within a visualiser, which does all the pre-buying checks, property level scores etc. rather than having separate systems,” he explained. “It gives real-time event response, portfolio growth tools, supporting underwriting and expansion. That is complemented by our portals, which is where we develop a view on risk and provide insights through our global strategic advisory business. It is a kind of delivery mechanism for making sure everything’s on one ecosystem.”

Given that supply will continue to outstrip demand, though that is growing too, such tools can only help clients make informed choices. For a broker, this means opportunity. “We’re in an interesting dynamic: with very few exceptions, there is no issue with supply versus demand. On the cat side, we expect demand to increase by about 2% to $10 billion worldwide. That’s not a lot compared with the increase in capital that’s been retained. 

“We are also seeing more fac opportunities. But, overall, we see an opportunity to align [reinsurance] to our overall client proposition: to use our systems and technology and insights to allow the better management of ceded reinsurance and underwriters to have a more holistic view of their overall treaty strategy.”

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