Industry consolidation highlighted by Marsh & McLennan/JLT mergerPosted On: Oct. 9, 2018 7:00 AM CST
COLORADO SPRINGS, Colorado — Marsh & McLennan Cos. Inc.’s announced $5.6 billion acquisition of Jardine Lloyd Thompson Group PLC was the buzz of the Insurance Leadership Forum last week, serving as yet another reminder that merger and acquisition activity is likely to persist in the industry.
It also raises important questions about what insurer and broker consolidations mean for risk managers, particularly with regard to the ability to pay claims, offer new products and services and the potential pricing impact, insurers and brokers say.
The brokerages are still in a quiet period and have not yet had integration meetings and probably will not have such meetings for another couple of weeks, Mike Rice, executive chairman of JLT Specialty USA in Denver, told Business Insurance on the sidelines of the forum, sponsored by the Council of Insurance Agents & Brokers in Colorado Springs, Colorado.
“There’s a lot of excitement, a lot of uncertainty,” he said. “It’s been quite an unbelievable time in the last two weeks.”
The Marsh & McLennan/JLT news was just the latest in a string of major deals in the insurance industry. Marsh L.L.C. had already expanded its presence in Texas with the purchase of Houston-based brokerage Wortham Insurance & Risk Management, the 35th-largest broker of U.S. business with about $130 million in brokerage revenue, according to Business Insurance’s latest ranking.
The timing of the JLT acquisition was surprising, but not the fact that the brokerage was an attractive acquisition target, experts say.
“JLT is a terrific brand,” said Paul Horgan, Zurich Insurance Group Ltd.’s head of North America commercial insurance in New York. “I think anybody would have loved to bring them into their fold. For us, it just shows there continues to be a drive for consolidation, efficiency and really trying to leverage their platforms as much as possible.”
“Scale, stability, global presence — these are really important things,” said Matthew Dolan, president of North American specialty for Liberty Mutual Insurance Co. based in Simsbury, Connecticut. “The trick is bringing that all to bear in a fairly agile and digestible way. That’s the biggest challenge with all the scaling that Marsh and JLT will have.”
In August, Hartford Financial Services Group Inc. announced it agreed to buy global specialty underwriter Navigators Group Inc. for $2.1 billion in a deal analysts said would give the insurer a greater geographic and product reach.
In September, France’s Axa SA completed its $15.3 billion acquisition of Bermuda-based XL Group Ltd., while Liberty Mutual completed its $2.93 billion acquisition of Hamilton, Bermuda-based Ironshore Inc. in 2017.
“Merger mania is out there,” said Tom Fitzgerald, chief executive officer of Aon PLC’s global broking division in Chicago.
“The storms of 2017 and lack of aftermath in the market — I think that was the final wake-up call, if anybody needed it, that our business is no longer as cyclical as it once was,” said Joe Peiser, New York-based executive vice president and head of broking, North America, for Willis Towers Watson PLC. “The era of the hard market is over because the capital is just too fluid. It’s created an industry where in order to get return on equity, insurers are looking for growth through acquisition and then return through synergy. And I think we’re going to see more and more of that. And the same is true on the broking side. We’re going to see more consolidations.”
But “there is a point where a company is too big,” said Daniel Kaufman, senior vice president of H.W. Kaufman Financial Group Inc. in Farmington Hills, Michigan. “There’s internal strife when a company gets too big.”
The impact on risk managers from such consolidations is an ongoing topic of conversation in the industry, experts say.
“If you’re with a JLT, it’s because you’ve decided not to be with Marsh, Aon or Willis from the globals,” Mr. Horgan said. “As those options begin to become less and less, that does change the capability out there, or the challenge for the globals as they consolidate those entities (is) how do they maintain the entrepreneurial or boutique service model that they have, that those customers consciously bought.”
“Clients like simplification,” Mr. Fitzgerald said. “If that means XL and Axa can do more stuff or bigger lines, that may become interesting. You would think larger insurers mean greater innovation, greater insight, greater willingness to put capital to work, and I think it’s incumbent upon the industry to continue to push that envelope. In some cases it happens. In other cases it doesn’t. Clients do have a sensitivity to being overweight with carriers, and there’s a plethora of options. It really does come back to claim performance. I think clients have no problem putting big stacks of limit with a carrier if they conscientiously believe that following the claim they’ll get paid.”
“There’s some concern about choice and a reduction of choice,” Mr. Peiser said. “There have been a lot of consolidations over the last several years, but what we have not seen is any material impact on capacity or any material impact on pricing. Many buyers look at the consolidations and they fear reduced capacity and they fear increased pricing, but since it hasn’t happened yet, I wouldn’t say that fear is acute.”
On the positive side, many risk managers welcome the financial strength being created through these transactions, he said.
“And I think it’s noteworthy that after those storms of 2017, in our industry, we had hardly a whisper about insolvencies,” Mr. Peiser said. “I think the magnitude of those losses, had they happened 25 years ago, it would have been one after another. I think risk managers see the insurance industry as very healthy and very sound, and that’s very welcome.”
Risk managers have had positive responses to the Marsh & McLennan/JLT news by and large, but they are asking questions about keeping their brokerage teams intact, Mr. Rice said.
“I think (there’s) concern that people aren’t going to have their team, but as far as we’re concerned, the team is going to be there,” he said.
They are also monitoring the ongoing impact of the insurer consolidations, Mr. Rice said.
“Good risk managers pay attention to their counterparty relationships,” he said. “They’re looking at their ratings from a financial perspective. They’re looking for brokers to advise them on which carriers pay claims and which ones don’t. It’s not just the ability to pay. It’s the desire to pay. And they’re looking for insights as to ‘if two companies merge, are they going to be committed to products they were committed to before? And if I had a lot of limit with those two in the past, am I still going to get it, and does it make sense to have it all with one carrier?’”