THE HALES REPORT 1185 Avenue of the Americas, 32nd Floor, New York, NY, 10036 | [email protected] Issue #20, Vol: 2 October 2, 2018 Inside This Issue Record M&A Year Continues With #1 Marsh Buying #6 JLT Near 13.5x EBITDA pg 1 AIG To Acquire Glatfelter, With Profitable Firemen + Other Programs pg 8 A New #1 Reinsurance Broker? Guy Carpenter + JLT Approaches Rival Aon pg 10 Lloyd’s InsurTech Report Sees Paradigm Shift; Market Returns To Profit In H1 pg 11 Endless Supply Of “Alternative” Capacity? Not So Fast… ILS Less Enthusiastic pg 15 InsurTech Update: Willis Sees Robust Funding; Lemonade Touts Growth pg 16 Argo Broker Survey Sees Optimism Over IT, Lack of Penetration In Cyber & Drones pg 19 Can You Say “Social Inflation”? FL Court Turns $100K Limit Into $8.5M pg 21 Brown & Brown Upbeat On The Economy & Ability To Leverage Data pg 22 Q3 Comes To A Close With High Catastrophe Activity Across The Globe pg 24 California Passes New Law Requiring Female Board Members pg 25 Hales Hits, Bindable Quotes & Deal Diary pg 26 Pace & Size of Intermediary Deals Continues To Grow With #1 Marsh Mac Acquiring #6 JLT For $6.4B (Enterprise Value ~13.5x EBITDA) #1 worldwide broker Marsh & McLennan surprised almost everyone with a fully priced offer to acquire #6 Jardine Lloyd Thompson for $5.6B cash/debt and $6.4B enterprise value. The surprise was not MMC’s desire to acquire JLT or willingness to pay a 30%+ premium, but the controlling shareholder being a seller. The stated rationale was to accelerate growth, with JLT having a greater weighting towards international specialty lines, including emerging markets. Overlap in the UK and U.S. will have to be the focus of headcount reductions. The transaction, to be funded 100% with debt and cash on hand, is a “pull forward” of normal M&A activity (averaged ~$1B (spend) annually). For the foreseeable future, save for tuck-in M&A opportunities at Marsh Agency, MMC will not be acquiring much “inorganic” growth. Exhibit 1 Top 10 Global Broker Ranking - $, B $15.9 $10.0 $8.1 $4.7 $1.9 $1.9 $1.9 $1.8 $1.7 $1.6 #1 #2 #3 #4 #5 #6 #7 #8 #9 #10 Source: Co Reports The Hales Report Contact: [email protected] Page 1 Historical Context, Increasing Size (& “Power”) of Intermediaries: The secular trend of consolidation amongst insurance intermediaries has been a consistent theme over the past 30+ years, reinforced more recently by the increased activity of private equity “roll ups.” Year to date we have seen near record activity with 436 announced deals (vs. 440 at this time last year) involving 4 of the Hales Top 100 intermediaries. Looking back over roughly 30 years, the Top 20 brokers/agents have now completely consolidated into just the Top 3 brokers: U.S. based Marsh & McLennan, UK based Aon PLC and Ireland-based Willis Towers, each publicly traded. AMAZING. The base of today’s Marsh & McLennan was effectively three large / transformational transactions (in contrast to peer Aon), most notably #6 Johnson & Higgins in 1997 (added $1.2B of revenue or >35%) and #3 Sedgwick in 1998 (added $1.5B and >35%). JLT comes in as the 3rd largest deal, with $2B of revenue adding 13% to Marsh Mac’s existing $15B revenue base (adding ~23% to the brokerage-only segment of the firm). MMC’s share of the Top 20 revenues increases to ~30%, which is just 3pts ahead of the 27% share in 1989 (at a time when Marsh Mac was less than 20% of its current size, at only $2.5B of revenues). Exhibit 2 THREE DECADES OF BROKER CONSOLIDATION 1989 1989* Top 20 2017 2017 Top 20 Rank Broker ($, B) Mkt. Sh. Rank Broker Ownership ($, B) Mkt. Sh. 1 Marsh McLennan $2.5 27% PF Marsh & McLennan Public (NYSE) $15.9 30% 2 Alexander & Alexander $1.2 14% 1 Marsh McLennan Public (NYSE) $14.0 26% 3 Sedgwick Group $1.0 12% 2 Aon PLC Public (NYSE) $10.0 19% 4 Johnson & Higgins $0.8 9% 3 Willis Towers Watson Public (NYSE) $8.1 15% 5 Corroon & Black $0.5 5% 4 Arthur J. Gallagher Public (NYSE) $4.7 9% 6 Willis Faber $0.5 5% 5 Brown & Brown Public (NYSE) $1.9 4% 7 Frank B. Hall $0.4 4% 6 JLT Public (LONDON) $1.9 4% 8 Rollins Burdick Hunter $0.3 4% 7 Hub International Private Equity $1.9 4% 9 Minet $0.3 3% 8 BB&T Insurance Bank / Public $1.8 3% 10 Jardine Insurance Brokers $0.2 3% 9 USI Private Equity $1.7 3% TOP 10 $7.7 86% 10 Lockton Private $1.6 3% 11 C.E. Heath $0.2 2% TOP 10 $47.6 89% 12 Arthur J. Gallgher $0.2 2% 11 Alliant Insurance Private Equity $1.1 2% 13 Bain Clarkson PLC $0.2 2% 12 NFP Private Equity $1.1 2% 14 Hogg Group PLC $0.2 2% 13 Acrisure Private $1.0 2% 15 Faugere & Jutheau $0.1 1% 14 AssuredPartners Private Equity $1.0 2% 16 Jauch & Hubener $0.1 1% 15 BroadStreet Partners Private Equity $0.5 1% 17 Hudig-Langeveldt Group $0.1 1% 16 Edgewood / EPIC Private Equity $0.4 1% 18 Gras Savoye SA $0.1 1% 17 Integro USA Private Equity $0.3 1% 19 Sodarcan $0.1 1% 18 CBIZ Public (NYSE) $0.3 1% 20 Hilb, Rogal & Hamilton $0.1 1% 19 Leavitt Group Private $0.2 0% TOP 20 $9.0 100% 20 Risk Strategies Private Equity $0.2 0% Source A.M Best Review; *Brokerage Revenue TOP 20 $53.7 100% Source: Company Reports, The Hales Report *USI shown pro forma for Well Fargo acquisition; ** Locton Preliminary est The Hales Report Contact: [email protected] Page 2 It is notable, though, that this is the largest deal for current Marsh & McLennan management (CEO Dan Glaser joined in 2007 as Chairman & CEO of Marsh). The team was initially tasked with fixing internal issues, including fallout from NY AG Eliot Spitzer’s attack on the business (contingent commissions) in the mid-2000s. “Tuck in” M&A reemerged as a focus more recently, including the build out of Marsh Agency (beginning in 2009), but large transformation deals were off the table. “Starting from about 10 years ago when we were rebuilding some of the capabilities of the firm, we talked about that we needed to earn the right to do a large transaction. A Large transaction would not have made sense for us 5 years ago or 7 years ago. We needed to build the proper foundation. We did so. [And] we maintained lower leverage just in case this kind of opportunity were to ever came about.” - Dan Glaser, Marsh & McLennan CEO, September 2018 Valuation Considerations…Nearing Peak Multiples? PE Taking Notice. Any way you slice it, Marsh Mac clearly paid a full price for JLT, reflecting the scarcity value of large brokers & the price likely necessary to gain commitment from JLT’s largest shareholder (Jardine Matheson Holdings). As highlighted below, at the time of closing (Spring 2019), the valuation looks like ~2.8x forward revenue, ~30x GAAP after-tax earnings and ~13.5x EBITDA. We’ve discussed at length the substantial activity/competition in broker & agent deals but, based on recent transactions, believe this could be the high-water mark for deal valuations. Several recent financial services deals have pushed into the low to mid teens multiples of EBITDA (incl. claims manager Sedgwick last month). Exhibits 3, 4 and 5 JLT Forward Revenue JLT Forward Earnings JLT Forward EBITDA Revenue Price-to-Revenue Earnings Price-to-Earnings EBITDA EV-to-EBITDA Spring Spring 2019 $2,250 Spring 2019 3.0 $300 2019 35.0 $600 closing 18.0 $2,200 closing closing ~13.5x 16.0 30.0 ~2.8x 2.9 $250 32.9 ~30x $500 $2,150 2.9 16.0 14.0 2.8 25.0 $2,100 $400 13.8 12.0 $200 25.5 $2,050 12.4 2.7 22.4 20.0 10.0 $2,000 2.7 $150 $300 $2,220 8.0 2.6 15.0 $515 $1,950 $250 $465 $220 $2,070 $100 $200 $400 6.0 $1,900 2.5 $170 10.0 4.0 $1,850 2.5 $1,925 $50 $100 2.4 5.0 2.0 $1,800 $1,750 2.3 $0 0.0 $0 0.0 2018E 2019E 2020E 2018E 2019E 2020E 2018E 2019E 2020E Source: Company Reports; Consensus Estimates (FX adjusted); Hales Analysis The Hales Report Contact: [email protected] Page 3 We would not be surprised to see the current PE owners of sizeable agent/broker platforms (18 in the Hales Top 100), with a holding period of more than 3-4 years, looking to take advantage of the current pricing dynamics (and low interest rates), to accelerate exit options over the short to intermediate term. The JLT deal took a mere 11 days to come together, when a meeting between the 2 CEOs presented “an opening that I had not seen before” (MMC CEO Dan Glaser) = the Asian based owners historic “buy and hold” strategy had changed. The 34% premium could have happened at any time given the strategic nature of the deal. So it’s clear the controlling shareholder had a use for the proceeds in focusing on development of its Asian operations (per SEC filing). Timing is everything. It’s also worth noting that closest peers Aon and Willis Towers are consumed (both financially and strategically) with their own internally focused restructuring programs, limiting the likelihood of any competing bid.