April 1, 2015 – By Diane Alter – M&A activity in the reinsurance space is heating up and is expected to continue for some time.
Tuesday, Endurance Specialty and Montpelier Re announced that they will merge in a $1.83 billion cash and stock transaction. The deal comes after Bermuda based Endurance abandoned it $3.2 billion hostile pursuit of Aspen Insurance last summer.
The deal comes on the heels of RenaissanceRe having completed an acquisition of Platinum Underwriters in March. In January, Axis Capital announced plans to merge with PartnerRe, and Catlin Group agreed to sell to Dublin-based XL Group. Catlin, a Lloyd’s of London company, is based in Bermuda.
The reinsurance industry is expected to see this consolidation trend persist as firms aim to put idle cash to work and attempt to grow in a generally soft market, according to a reinsurance industry expert with three decades of industry experience and firsthand knowledge of activity in the space. “Deal are getting bigger in size,” this person told CT Financial News. “You used to see deals around $1 billion. Now a $10 billion transaction is the norm. And, hedge funds have taken an interest in reinsurance risk. Lots of people and capital are coming into the market.”
To be sure, hedge funds are looking to capitalize on the increased interest by pension funds and endowments in reinsurance. With the stock market’s six year bull run boosting valuations and yields painfully low, pension funds and others are herding into the reinsurance market in search of returns.
Big deal announcements are anticipated to become more frequent as excess reinsurance capacity, challenging market conditions, increased competition, and shrinking demand continue to pressure pricing and reinsurers’ bottom lines.
In the past, reinsurers responded by using excess capital to buy back billions of dollars of their own shares. But with stock prices climbing thanks to record breaking equity market rallies, buybacks have become less attractive and acquisitions more so. Indeed, big firms are having trouble growing organically and are buying growth via acquisitions.
“The reinsurance business is highly cyclical,” our source said. “What you are seeing now is a consolidation cycle. It’s a common and normal occurrence. It takes out excess capacity.”
—Frank Harrison, CEO, Holborn
Frank Harrison, President and CEO of Holborn Co., an independent reinsurance brokerage firm formed in 1920, making it one of the most experienced brokers in the space, agrees. He said the recent burst of mergers has created an awakening, even a panic of sorts, on the senior floors of reinsurance companies. The thinking, or more aptly the fear, is that the recent flood of combinations has created a new paradigm where the remaining small players are being dwarfed by their larger counterparts and thus may be unable to compete.
“Make no mistake about it, consolidation in financial services has been occurring for decades and will continue in the coming decades, and it most certainly includes the insurance/reinsurance space,” Harrison told CT Financial News.
Despite the fresh flurry of M&A activity in the space, opportunity still exists and will for a good while.
“As in the past, the consolidation phase will pass and new, smaller, more nimble competitors will emerge to offer specialized services and more choices,” Harrison continued. “A new cycle begins and, inevitably, over time, the new, smaller companies begin to consolidate. The cycle never ends.”
Which begs the question who are the next likely buyers and who are prey.
“Companies with a market cap in excess of $10 billion are the big buyers,” our source said. “There are some 20 companies that fall into that space. When you see M&A synergies you move quickly to do a deal.”
Our contact correctly predicted ahead of press time that Montpelier was the next likely target. As for who is next after yesterday’s announcement, “Aspen,” our source shared. “Also, maybe Ariel Re or Argo Group.”
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