05/09/2023, 01:06 Inside Howden: Targeting world domination – Part 1

Inside Howden: Targeting world domination – Part 1

Adam McNestrie, Ben Wylie 03 May 2023

L to R: David Howden, Dominic Collins, Elliot Richardson

David Howden has raised a lot of eyebrows by consistently telling the
world that the eponymous brokerage he leads is a true challenger to the
Big Three.
Many in the market have looked at this askance, not only because of the massive disparity in
size, but because Howden lacked many of the other things that define that group: treaty
reinsurance broking at scale, US retail, large account broking, non-broking professional
services units.
Howden signalled a desire to emphatically address this by acquiring TigerRisk for $1.6bn last
year. It followed up the closing with a series of team raids including Guy Carpenter European
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CEO Massimo Reina and ~30 colleagues that herald efforts to build a global reinsurance
broking footprint, and a full suite of specialties.
But it intends to make a much bigger strategic step during the next two to three years, as it
seeks to live up to its avowal that it can rival the Big Three.
Sources have said that Howden intends to get into the $40bn-$60bn-revenue US retail market
via a transformational acquisition-cum-merger.
And it is understood that Howden’s ambitions for that US retail deal will be huge, with a likely
enterprise value for the acquisition of $10bn-$20bn, something which would put the bottom
end of the top-10 US retailers in scope.
The move reflects both Howden’s arrival at the “JLT Dilemma”, where large clients need an in-
house US retail capability, and the lure of the $2tn total addressable market.
Howden has quietly dropped prior messaging around not getting into US retail broking, which
had been designed to protect its lucrative third-party US wholesale business, which is
originated from US retailers.
If a deal is consummated, it will provide ammunition to Howden’s wholesale competitors in
London accusing it of competing with its customers. However, sources have said it is a
calculated risk that makes sense, given the relatively small percentage of group revenues
represented by third-party US wholesale broking, and the dearth of scaled wholesalers in
London that lack conflicts.
The risk of revenue breakage may be further managed through additional large M&A
transactions before a US retail deal, with Howden believed to be interested in a Continental
European mega deal, and/or an Australian transaction. Such deals would further dilute the
percentage contribution of US wholesale to group revenues.
This transformation – alongside the reinsurance build-out – would create a platform for
Howden to attack the large account/multi-national oligopoly of Marsh, Aon and WTW, it is
understood, where sources believe market share is comfortably +80%.
The strategy is incredibly ambitious. Last year, I referred to evidence that the group is empire-
building. Well, it probably makes more sense now to say that Howden is plotting to take over
the world.
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In its almost 30 years of life to date, Howden has built an impressive track record of execution,
but it is important not to over-weight this in judging the chance of success.
The group underwent a step change in the speed of movement, and the size of bets it is
making in around 2021.
In so doing, it elevated its risk profile. As noted last year, it has taken on a)
complexity/integration risk, b) risk to its culture, c) and the risk of a failed mega deal.
But there are four further risks not touched on in our prior coverage that mean a plan as bold
as Howden’s has a small landing zone.
These include financing risk, given that the business is currently deploying a lot of cashflow
into team lifts, and securing the resources for new M&A and deferred consideration on existing
deals via equity and debt raises.
A US retail pivot would also add the risk of dis-synergies from channel conflict (and the
potential for associated talent flight).
Further, Howden faces UK-into-US execution risk – with British businesses rarely successful in
full-throttle, onshore US growth.
Perhaps, most importantly, the group has illiquidity risk. Howden has created hundreds of
paper millionaires through equity incentive schemes and generated major unrealized gains for
its institutional backers General Atlantic (GA), CDPQ and Hg. (When GA bought in, the
enterprise value of the business was just under £400mn.)
As a growth business, it is not paying dividends, and new equity and debt drawn into the group
are being directed towards acquisitions and team lifts.
Sources have said that Plan A is for the business to remain perma-private, and if the growth
plans are landed in a few years, it could conceivably be the largest privately owned brokerage
in the world.
But at some point, staff shareholders will want to crystallize their wealth creation, and
institutional owners will want to realize their gains. Trying to refinance the group privately at
the kind of scale that is envisaged could be highly challenging. Hub's efforts to partially
refinance at a mere $23bn valuation were not smooth.
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The only way to square the circle may be to take the business public. But this will create
challenges of its own, as the business would need to de-lever, and likely transition into more of
a steady-state firm with a greater focus on building an integrated operating model.
Howden has proved an adept manager of risk to date, and there is a case to be made that all
these risks are individually manageable. But they multiply up, and with so many in play, there is
an increased chance that something, somewhere goes wrong.
This deep dive will be divided into two halves, with the first covering growth strategy and the
second the risks to execution.
Here are the key points for Part 1, with the detail below.
Howden made a gear-shift on growth in 2020, spending close to $5bn on four major M&A
deals, including reinsurance broker TigerRisk, and ramped up the frequency and severity
of team lifts
The business is poised over the next two to three years to go elephant hunting in the
$40bn-$60bn revenue US retail broking market, seeking a $10bn-$20bn EV deal
It is working to build out a global reinsurance broking footprint, including building its small
Asia-Pacific operation and adding new lines of business
It is also eyeing major Continental European and Australian M&A, alongside further
international tuck-in M&A and growing Dual to $5bn of GWP
The gear shift
In the past two years, Howden’s growth has inflected upwards, pushing the group towards
what we would call its “JLT Dilemma”.
In the financial year running to 30 September 2020, Howden reported £777mn of revenues and
adjusted Ebitda of £223mn, placing it towards the bottom of the top-20 brokers globally.
Run the clock forward two years, and the business was 2.4x as large on the top line, and 2.5x
on earnings, reaching £1.84bn of revenues and £565mn of adjusted Ebitda, with its growth
outpacing any other brokerage of scale with the possible exception of Acrisure.

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Howden's 2022 revenues and earnings were more than 2x as high

as in 2020
Revenue and Adjusted Ebitda reported by Howden Group in year ended 30 September 2020 and 30
September 2022

Source: Howden Group

This reflected four mega deals with a combined consideration of approaching $5bn, as well as
organic growth of 19% in its 2021 and 2022 financial years. Having waited six years since its
£400mn acquisition of London wholesaler RK Harrison, it raced through A-Plan, Align, Aston
Lark and TigerRisk in 21 months. (Then there was the $4bn+ deal that got away, with Howden
raising the money to buy both Willis Re and a number of Willis’ Continental European assets.)

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The purchases of Align and Aston Lark added £1.8bn of intangible

assets to Howden's group balance sheet
Book value (£mn) of acquired goodwill and intangible assets reported on the consolidated balance sheet of
Howden Group Holdings Limited

2010 2012 2014 2016 2018 2020 2022

£3,928mn
Data as at 30 September in each year | Company known as Hyperion Insurance Group Limited until 2020
Source: Group financial statements

The organic growth was also supported by an acceleration of team lifts and a willingness to
contemplate hiring at much greater scale.
There were a number of developments that came together to support this gearshift.
The first was significant talent dislocation resulting from Marsh McLennan’s $5.6bn acquisition
of JLT and Aon’s terminated acquisition of WTW.
Second was a broadening out of Howden’s investor base, with PE house General Atlantic –
which had backed the business since 2013 – joined by Canadian pension fund CDPQ in 2017
and private equity house Hg in 2020.

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Howden's enterprise value has increased almost 30x in a decade

Reported enterprise value of Howden at various points between 2013 and 2023

Source: Howden Group

The third was the willingness of debt markets to allow Howden an add-back for some costs
relating to team rips, essentially allowing it to raise the finance to support the team lifts based
on favourably adjusted earnings numbers.
This all came against an incredibly supportive backdrop for the private brokers, with extremely
cheap leverage and seemingly endless multiple expansion on platform valuations.
This combination of factors can support their case for a pivot to a more aggressive growth
strategy in 2021, but for a business in such a hurry now, it feels like it was slow to move in
target areas.
Going big in UK retail in 2020/21 having left the field open to competitors for years meant
Howden had to buy at higher multiples. The same thing is true in the US with MGA Align,
bought at 20x or above.
All of the sector developments referenced above supported the rapid build-out of an
international distribution business. Over time Howden came to comprise a cornerstone position
in the UK retail market; an international specialty network spanning Europe, Latin America and
Asia Pacific; a London market wholesale proposition; an MGA, Dual, that included a US arm;
and a reinsurance broker.
Squint and this was JLT reassembled, particularly when you note that Howden hired hundreds
of JLT alumni following its sale to Marsh McLennan.
But all of these moves are pushing Howden towards its own “JLT Dilemma”. The JLT Moment
refers to CEO Dominic Burke's realisation that a presence in the US retail market was a
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strategic imperative to serve clients, particularly in the large account space.

His answer to that challenge, which was inhibiting growth, was to launch a start-up in the US
led by Aon veteran Mike Rice.
Long-term, Howden will not escape the same strategic imperative, and – partly owing to JLT’s
struggles in the US – will choose the road not taken: an acquisition at scale. (As an aside, JLT
almost walked this path, getting very close to a deal with a major US retailer that did not quite
come to fruition.)
Of course, the promise of the US is also just a total addressable market that dwarfs anything
anywhere in the world, with just over $2tn of premiums versus roughly $4tn globally. Even if
your clients do not need you to be in the US retail market, your investors probably do.
Elephant hunting
Howden will find a US retail broking space full of potential partners. There has been an
explosion of private equity involvement in the sector over the last 15 years, with 30+ platforms
now operating.
With a scaled international business, a large MGA arm in the US and the fourth biggest
reinsurance broker in the US, it will have a lot to offer strategically to a business looking for a
combination.
Given the number of operations, there is a huge spread by scale, business mix and quality.
Sources expect Howden to look for a major platform, potentially similar in size to its existing
business at the time of the deal. They further expect it to look for a quality franchise, and
potentially one with more specialty capabilities.
If Howden were to wait a couple of years
for a deal, and you scaled it up by around
20% annually, it could have an enterprise “Picking the right partner will be the
value of ballpark $20bn pre-deal. most important choice in the group’s
history and represent a defining
There is no good dataset for private US moment”
retail broker earnings, but at that sort of
scale, Howden could look for a deal with
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firms near the bottom of the top 10, and certainly in the top 20 – think $600mn-$1.2bn of
Ebitda in round numbers.
Businesses like NFP, Risk Strategies, or Alera are plausible names. USI is also possible. Alliant
would make sense, although it may be too big by that point.

Ownership of active private-equity-backed brokers

Broking platform Current backers

Alliant Insurance Services Stone Point, PSP

Hub H&F, Altas

USI KKR, CPDQ

Galway Insurance Holdings Harvest Partners, Oak Hill, Carlyle

Relation Aquiline

Hilb Group Carlyle

Assured Partners GTCR

Broadstreet Partners Ontario Teachers' Pension Fund, Century Equity Partners

Acrisure Management, various PE investors

Risk Strategies Kelso

NFP Madison Dearborn, HPS

One Digital Onex

Alera Genstar, Flexpoint Ford

PCF Insurance Owl Rock

Foundation Risk Partners Partners Group, Warburg Pincus

High Street Partners Abry

Patriot Growth Insurance Services GI Partners, Summit

StoneRidge Insurance Brokers CIVC Partners

World Insurance Associates Charlesbank

Sunstar Insurance Group BBH Capital

Inszone BHMS

Crest Insurance Group CIVC Partners

Oakbridge Insurance Corsair Capital

TRICOR JC Flowers

King Insurance BHMS

Source: Optis Partners

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Sources believe the other limiting factor will be a red line around the group CEO role for David
Howden, something which would necessitate the CEO of the other group stepping down or
moving into a secondary role.
Picking the right partner will be the most important choice in the group’s history and represent
a defining moment.
Superficially, it might seem that this could be a strategic exit for PE otherwise struggling to
monetise their investment. But in all likelihood there would be relatively little cash in a deal like
this, with the PE that backs the US retailer likely to have to believe in value creation via the
combination over time.
If a deal at the top end of this scale can be executed in the next two to three years, Howden
would likely become the largest ever privately owned broker, with huge geographical
diversification, and a presence right through the value chain.
Others won’t stand still, of course. Growth will continue to be an arms race in broking, and it is
possible that we will get a different mega-merger within the private broking ranks. But
Howden’s stated aim is to be a top-five broker in its chosen markets, and it seems a fair
assumption that once US retail is added to this it will be aiming to be a top-five broking group
outright.
Sources have said that even at this scale and beyond, the intent would be to follow the private
ownership model, albeit with more widely syndicated private ownership that may involve
additional sponsors, and potentially sovereign wealth.
Many roads to growth
Alongside this, Howden has other ambitions for simultaneous growth, including major growth
of existing platforms and the addition of new ones.
Rather than pausing to consolidate following the TigerRisk acquisition, the group is out right
now trying to build out its Asia Pacific team to complement Massimo Reina’s European team,
which would give it the key pieces of a true global reinsurance footprint. That European team is
also still under construction, with efforts to hire in Germany also taking place, according to
sources.
Alongside this, it is looking to build out in other lines of business, having lifted out Aon’s
London cyber team last month.
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TigerRisk delivered $213mn of revenues in the year to 30 September. Howden’s reinsurance

arm had revenues of £60mn, and Bowood and Capital Markets a further £50mn. Total pro
forma reinsurance broking revenues totalled ~$360mn.

Howden Tiger's trailing reinsurance broking revenues total

around $360mn in aggregate
Reinsurance broking revenues for the year ended 31 December 2022

Aon Reinsurance Solutions $2,190mn

Guy Carpenter $2,020mn

Gallagher Re* $900mn

Howden Tiger† $360mn

* Per Insurance Insider sources; Gallagher Re has limited ceded fac business
† Per Insurance Insider sources; data is for the year ended 30 September 2022
Source: Company financial reports; Insurance Insider

Beyond reinsurance, Howden has made clear via public statements that it believes there are
more platform deals to be done. After inking the TigerRisk deal last year, David Howden told
Insurance Insider that there were more mega-deals to be done in Europe.
Sources said that bondholders have been told that France is a key target market, and French
broker Gras Savoye is known to have been a major part of the attraction of the Willis Towers
Watson European assets Howden was targeting. Germany also has a marketplace with
potential scaled targets like Funk or GGW, with the latter backed by Howden investor Hg.
Howden has done far more to build in Continental Europe than peers, but its European broking
business still represents only ~16% of group revenues.
It is further understood that Howden showed an interest in Envest, the independent Australian
broking platform Ardonagh acquired in November last year for A$482mn ($323mn) – pointing
to its M&A ambitions in Australia.
Sources have previously pointed to the quoted Australian brokers – Steadfast, AUB and PSC –
as potential targets. These are big businesses, though, with the smallest PSC having a market
cap of A$1.6bn and the largest, Steadfast, A$6.1bn.
Some existing Howden businesses are also perceived as having major runway on growth, with
Dual having a stated target of building GWP to $5bn, roughly double today’s volumes. Although

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huge for an MGA, with £321mn of 2022 revenues, it represents only 17% of group revenues.
The business is, however, a profit machine and delivers adjusted Ebitda margins of ~40%.
Tuck-in M&A deals in smaller markets will no doubt continue as well with over 30 deals inked in
the 2022 financial year.
Ambition brings risk
The scale of Howden’s ambition is huge, with the pace of movement dizzying, and the number
of fronts the group is targeting at once striking.
This is the plan to take over the world.
With ambition of this sort, however, comes risk. In the second of a two-part series on Howden
due to run tomorrow, the risks the group is running to get there will be examined in depth.

TAGS ANALYSIS BROKERS HOWDEN

Adam McNestrie
EDITOR-AT-LARGE

Ben Wylie
SENIOR DATA JOURNALIST

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