Insurance News

Financial crisis expected to fuel reinsurers’ M&A activity

Posted on: September 23, 2009

MONTE CARLO, Monaco?Mergers and acquisitions are expected to gain momentum as reinsurers look to accelerate growth after the financial crisis, experts said at the Rendez-Vous de Septembre.

Attendees at the annual reinsurance gathering in Monte Carlo, Monaco, said an expected recovery in the world financial markets later this year, combined with a return of capital to the reinsurance sector, likely will drive the consolidation trend.

?Over the next 24 months, M&A activity is likely to be robust,? said David Priebe, chairman of global client development for New York-based Guy Carpenter & Co. L.L.C. ?Expect reinsurers to consolidate to accelerate growth, capture market share, and use economies of scale to push margins wider.?

Brian Duperreault, president and chief executive officer of New York-based Marsh & McLennan Cos. Inc., also forecast a wave of mergers and acquisitions, and views consolidation as a natural development after the financial crisis.

?Equity and credit capital, now more available with the recent thawing of the financial markets, are likely to be integral to a wave of M&A activity. Some carriers realize that they will have to acquire or be acquired,? Mr. Duperreault told a PricewaterhouseCoopers L.L.P. breakfast in Monte Carlo.

In addition, the financial crisis has resulted in many companies still trading at or below their book value per share and ?that makes them attractive targets,? said Paddy Jago, New York-based CEO of U.S. operations of Willis Re Inc., a reinsurance unit of Willis Group Holdings Ltd.

Continued soft market conditions also could influence the desire to grow through acquisitions, Mr. Jago said.

Several recent strategic transactions have resulted in tie-ups for European and Bermuda reinsurers looking to gain scale and access to capital. In July, Pembroke, Bermuda-based PartnerRe Ltd. said it would buy Zug, Switzerland-based Paris Re Holdings Ltd. in an all-stock deal valued at $2 billion.

After a bidding battle, Bermuda-based reinsurer IPC Holdings Ltd. agreed in July to merge with rival Validus Holdings Ltd. in a $1.77 billion deal. Validus broke up a planned merger between IPC and Bermuda-based reinsurer Max Capital Group Ltd.

In an interview, Max Capital CEO W. Marston Becker said he was ?still open to acquisition opportunities.? However, ?in this kind of market, it would take a unique situation to make it real,? he said.

?There’s a lot of reasons why consolidation is attractive, but there are still a lot of challenges to making that happen, because no one has the currency to pay a premium,? Mr. Becker said.

The IPC/Max Capital combination was intended as an all-stock deal before Validus launched a hostile bid that it revised several times with cash components.

?I think there will be more consolidation and, at some point, we may be a part of that,? said John Berger, CEO of Hamilton, Bermuda-based Harbor Point Ltd. ?We’re certainly open to anything that makes sense.?

While market speculation at Monte Carlo suggested that Harbor Point was in potential merger discussions with Bermuda-based reinsurers Ariel Reinsurance Co. Ltd. and Montpelier Re Holdings Ltd., Ariel Re Chairman and CEO Don Kramer dismissed the talk.

?There’s absolutely no truth to the three-way deal,? Mr. Kramer said. ?It wouldn’t make sense to combine with either because there’s too much overlap and we do the same thing,? he said in referring to high concentrations of property catastrophe business for the three companies.

Montpelier and Harbor Point declined to comment on market rumors.

?We’re always looking for opportunities, but right now the focus is more on diversification efforts,? said Mr. Kramer, who cited Ariel Re’s recent move to open a branch office in Zurich, Switzerland, to write credit and surety reinsurance beginning in 2010.

While observers generally agreed Bermuda is ripe for consolidation and likely will play a role in the next wave of M&A activity, others said they don’t necessarily expect Bermuda-based firms to look to combine.

?I think they’re looking at growth and diversification from outside Bermuda, rather than inside Bermuda,? said Caroline Foulger, a PricewaterhouseCoopers partner based in Bermuda.

Ariel Re and Max Capital are among several Bermuda-based firms that have added Lloyd’s of London platforms in the past year.

In addition, Ms. Foulger said, there may be ?less purchases of an entire company and more movement in terms of acquiring underwriting teams? because ?it’s much less risky.?

M&As also could satisfy private equity owners’ pent-up demand for liquidity, observers said.

?For the Bermuda-based firms who have not gone public, the shareholders may be looking for an exit strategy. So they may raise their hands and say, “Pick me,’? Ms. Foulger said.

Copyright © 2009 Crain Communications, Inc

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