Arthur J. Gallagher & Co. announced Friday that it has agreed to buy Willis Towers Watson PLC’s treaty reinsurance business for a purchase price that could rise to $4 billion.

The announcement comes less than a month after a deal for Gallagher to buy a larger slice of Willis’ business for $3.57 billion fell apart after the transaction it was contingent on – Aon PLC’s much bigger proposed acquisition of Willis – was terminated in the face of regulatory opposition.

Under the terms of the latest deal, which is expected to close in the fourth quarter, Gallagher will make an initial payment of $3.25 billion and potentially pay another $750 million subject to third-year revenue targets, a Gallagher statement said. Gallagher will take on about 2,200 Willis reinsurance staff.

The operations Gallagher is buying generated $745 million in pro forma 2020 revenue and $265 million in earnings. The figures include Gallagher’s estimate of “breakage” from lost business and employees. Numerous staff have left Willis since Aon announced its plan to buy its rival in March 2020.

In the earlier deal, Gallagher had agreed to buy operations that included $750 million in reinsurance revenue, including some facultative business; $500 million in European insurance brokerage business; and $50 million in North American insurance broking business. The agreed-upon price was widely regarded as a bargain resulting from Aon’s need to offload various Willis operations in an attempt to allay antitrust concerns.

In a note released Friday morning, Meyer Shields, Baltimore-based managing director at Keefe, Bruyette & Woods Inc., said the newly agreed-upon price was less than he had expected Gallagher to pay.

“We like the price, and we believe that (Gallagher) is very well-suited to reinforce Willis Re employee and client confidence,” he said.

In a conference call with analysts Friday, J. Patrick Gallagher Jr., chairman, president and CEO of Gallagher, said increasing its reinsurance brokerage business “has been a long-term strategic objective for Gallagher” and the acquisition was at “a really fair price.”

The estimated $265 million in net earnings that Gallagher expects to generate from the acquired business “contains only about $5 million to $10 million of synergies,” said Douglas K. Howell, chief financial officer of Gallaher. “This isn’t an expense take out deal,” he said.

The deal will significantly expand Gallagher’s reinsurance operations, elevating it into the top three behind the reinsurance broking operations of rivals Aon and Marsh & McLennan Cos. Inc.  

Gallagher is the fourth largest insurance brokerage in the world and Willis the third largest, according to Business Insurance’s latest ranking, and the deal will narrow the gap between the two.

The transaction will take Gallagher’s total brokerage revenue to about $6.7 billion. Willis reported $9.29 billion in revenue in 2020, including the reinsurance business it is selling.

The negotiations with Willis restarted following expectations that the brokerages’ reinsurance teams would unite following the proposed Aon-Willis transaction, Mr. Gallagher said.

“I think it was a clear disappointment on both teams’ sides that led to a phone call between (Willis CEO) John Haley and myself that said, ‘This might be an opportunity to look at something different,” he said.

In a Willis statement Friday, Mr. Haley said: “Following the termination of the proposed combination with Aon, we have been taking time to reflect on what we have learned about WTW over the last 16 months and determine how we will move forward as an independent company. As part of this, we conducted a review of strategic alternatives for Willis Re, our global reinsurance business. While we highly value Willis Re and our colleagues who contribute to its success, we concluded that divestment was the appropriate path for this business and for WTW.”  

Integration of the Willis operations is expected to take three years and cost $250 million, the Gallagher statement said.

The $250 million in integration costs consists mainly of retention agreements and the costs of migrating the Willis business to Gallagher’s reinsurance platforms, Mr. Howell said.

The acquisition will be financed with cash on hand, including the $2.25 billion that Gallagher raised in stock and debt to finance the prior deal, he said.