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Willis Re will be sold to clear path for Aon deal close: sources

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Willis Re will be sold as Willis Towers Watson and Aon seek to secure the necessary regulatory approvals to seal their mega-merger, this publication understands.

Sources said that the business that will be disposed of will include both the ~$700mn Willis Re treaty business and the ~$300mn facultative book, which currently sits within insurance unit Corporate Risk and Broking.

It is unclear what moves have been made to date to find a buyer for the business at this stage, but the pending disposal is one of the remedies under discussion with the European Commission as Aon and Willis take steps to get the transaction to the line.

Sources have said that AJ Gallagher is overwhelmingly the most likely acquirer of the business given regulatory insistence on a corporate acquirer with scale and significant presence in the insurance market, as well as the Illinois-based firm’s stated appetite to grow in reinsurance.

Given the need for speed of execution and regulatory imperatives, it is possible that the business will not even be widely marketed to a range of possible acquirers – potentially even mirroring the bilateral deal Marsh McLennan concluded with Gallagher for the aerospace business when it was seeking to close its acquisition of JLT.

To date, talks with Gallagher have not been confirmed, and it is understood that Aon has had approaches from other parties which could give rise to talks.

Aon and Willis are in the latter stages of trying to close the most ambitious piece of M&A in the history of the P&C sector to create an advisory business across broking and human capital benefits with ~$20bn of revenues.

As revealed earlier this week, Willis – with Aon's blessing – has already begun to take concrete steps to sell its combined French, German, Spanish and Dutch businesses as a block to satisfy the European Commission's competition concerns.

With revenues in the business estimated at around EUR750mn ($881mn), this suggests a combined disposal that is effectively in line with the $1.8bn disposals cap stated in the original merger agreement, which is equivalent to 19% of total Willis revenues.

Determination to close

The disposals cap effectively provides protection for the seller around the deal, and can provide an indication to investors of the level of divestitures the parties expect they will have to make in order to get a deal over the line based on their own antitrust analysis.

Crossing the $1.8bn disposals threshold would not mean that Aon automatically chooses to walk away from the deal, and indeed sources have said that the steps being taken by the parties imply an iron determination to close the transaction.

Throughout Aon has continued to publicly stress that it believes the deal – signed in March last year – can be closed by the end of H1, and it is yet to signal any give on that point.

This timetable points to the likelihood of accelerated timelines to dispose of all of the assets, although the simplicity of broking assets always lends itself to rapid deal-making.

Asked at the Inside P&C Live event last week about the firm’s appetite for reinsurance broking acquisitions, Gallagher CEO Pat Gallagher said “if there were acquisitions that made sense to us, we’d be happy to look”.

In addition, Gallagher has filed a shelf registration with the SEC that would allow it to rapidly issue equity, debt or preferred shares – something it would likely need to do to carry through a deal on this scale.

Although Gallagher remains the runaway favourite to acquire Willis Re, sources have also flagged Lockton and Howden as potential acquirers. However, it is firstly not clear they would be considered “suitable acquirers” to maintain competition.

Secondly, Lockton does not have a model that favours M&A, and Howden seems to have signalled its intent to grow organically by hiring in reinsurance after an audacious team raid from Guy Carpenter in London earlier this week.

The major private equity-backed retail platforms like Hub, Acrisure, USI, Alliant, NFP and Ardonagh could potentially execute a $4bn-$5bn deal, but the likelihood that they were willing to make the strategic departure and that they could secure the blessing of the regulator is relatively low. They would also likely offer slower execution to Willis/Aon.

The European Commission is believed to be sceptical around PE acquirers that would look to do the Willis Re deal as a pure standalone due to the importance of having an insurance broking platform to succeed in reinsurance, potentially closing the door on the large sponsors.

The missing piece

Although Willis Re and the cedant fac business are expected to be offloaded, sources suggested that Insurance Consulting and Technology (ICT), a stablemate within the Willis segment Investment, Risk and Reinsurance is likely to be retained by Aon.

ICT has revenues of upwards of $300mn and sells a range of services to insurance companies, the same client segment as Willis Re. This includes a range of advisory work around reserving, capital management, pricing and enterprise risk management.

One of the early rationales for the Willis-Towers Watson merger was the scope to cross sell between the client bases of the two companies. The revenue synergies resulting from the alliance between Willis Re and ICT are believed to have been one of the isolated success stories of that strategy.

Questions around whether the large account space should be treated as a separate market are outstanding and would pose the biggest impediment to the deal if the European Commission or the Department of Justice (DoJ) chose to ask for a remedy here.

However, merger arb sources suggest that offering significant remedies in one area can sway regulators and encourage them to sign off a deal despite concerns elsewhere.

With the European Commission and DoJ in close dialogue around the deal, clearance from the European regulator would potentially smooth the road in the US.

Aon and Willis declined to comment.

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