Berkshire Hathaway’s [NYSE:BRK-A] deal to acquire Alleghany Corp. [NYSE:Y] for USD 11.6bn was one of the largest in insurance since the aborted merger between Willis Towers Watson [NYSE:WLTW] and Aon [NYSE:AON].
That deal drew a cold eye from a new US presidential administration after Joe Biden took office. The Berkshire-Alleghany transaction does not appear to face the same potentially fatal regulatory hazards that doomed the mega-broker tie-up.
Warren Buffett’s latest haul would fall in line with trends, as reinsurers like Alleghany will continue to look for scale and small brokerage consolidation will remain at a torrential pace.
Insurance deal value has been on the rise since 2019, and the USD 76.4bn registered in 2021 was the largest in more than a decade, according to Dealogic data.
Reinsurance demands size
The reinsurance subsector into which Berkshire is making a play with Alleghany could see an upswing in consolidation, says Cathy Seifert, an insurance analyst for CFRA Research.
The volatility and magnitude of catastrophe claims in recent years, such as California’s wildfires, have pushed more primary insurers’ losses into reinsurance coverage. The trend has pressured the financial results of reinsurers even while it has been pushing premium rates higher to grow the top line, Seifert says.
The business of transferring risk from primary insurers has become pricklier for reinsurers with market caps beneath the global giants Munich Re and Swiss Re, she says.
“I wouldn’t be surprised to see an increase in consolidation among some of the smaller players, even though many of them have fairly attractive underwriting track records,” Seifert says.
Their share prices have lagged the broader markets despite some built-in underwriting advantages to adjust to the catastrophe trends. The upshot is a sector of public companies with sound financials and discounted valuations, such as Arch Capital Group [NASDAQ:ACGL] and Everest Re [NYSE:RE].
Small broker buys are safer
The conditions for broker consolidation persist and will continue to drive the number of insurance buys for as long as anyone can see. The ability to roll up small, fast-growing brokers remains attractive to both public and private equity backed consolidators drawn to the reliable and expanding cashflows and low overhead costs.
Consolidation is part of the business models for large public brokers like Arthur J. Gallagher [NYSE:AJG] and Brown & Brown [NYSE:BRO] along with PE-sponsored behemoths like Hub International and Acrisure.
The unravelling of the Willis-Aon deal put a chill on large, global brokerage combinations, Seifert notes. Willis suffered a massive talent drain and must now work to rehabilitate its franchise in the aftermath of the failed merger, she says.
Small-scale broker M&A remains safer.
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