M&A activity set to continue

M&A activity set to continue

This year has already seen PartnerRe and Axis Capital agree to merge, XL Group progressing with its acquisition of Catlin, and RenaissanceRe heading towards completion of its purchase of US specialty player Platinum Underwriters.

Adding to these deals was an announcement by Fairfax on January 17 that it had reached a deal to acquire Brit Insurance for $1.88bn.

The push behind this M&A activity appears to be a desire to diversify and grow in a highly capitalised and intensely competitive marketplace, and while re/insurers have in the past attempted to expand through growing their in-house capabilities, it looks as if acquisition may be the preferred route for the industry in the near future.

“I think acquisition is the way re/insurers are going to diversify now,” Nomura analyst Cliff Gallant told Reactions.

“Over the last few years they’ve tried to do things independently and I think that some have had success with that. But I think the pressure has intensified and I think the corporate desire is to do this quickly and diversify overnight.”

Gallant says that the industry desire for M&A is primarily being driven by the squeeze on re/insurers’ bottom lines from increased competition.

“I think that the competitive environment with prices coming down as much as they have, is spurring this activity,” said Gallant.

“You look at 2014 results, a year where there were no big catastrophes, ROE was below double digits. These numbers are not great for a low catastrophe year and I think that shows that companies are either not leveraging their capital, in other words not taking risk, or the price they are getting paid to take risk isn’t very good.

“So they need to do something because they are aware that’s a sub-par performance for a low catastrophe year.”

The abundancy of capital coming into the market from external financial funds means that diversity and size may be the key to survival if the market continues to see an influx of new entrants, especially given the pressure seen within the traditional catastrophe market in recent years.

“I think that, with all the M&A activity we have been seeing in recent weeks, there certainly seems to be more emphasis on having diverse portfolios, a spread of risk and a range of specialties,” says Gallant.

“I think that more importance is being placed on having various strengths in different lines of business plus having size.”

The first few months of the year have seen a number of high profile M&A deals, particularly in the Lloyd’s market.

In what is proving to be an environment of larger and more global deals, Lloyd’s has a unique appeal to those seeking to make acquisitions.

According to ratings agency AM Best the London insurance market has access to a variety of international markets, and this makes more Lloyd’s market M&A activity likely in 2015.

“For companies looking to enter or expand into high-growth markets, Lloyd’s international licences in countries such as China and Brazil are a key consideration,” said Yvette Essen, director, industry research – Europe & emerging markets at AM Best.

Gallant agrees that Lloyd’s is attractive to a lot of market players.

“I think it’s the beginning of a trend and I expect a lot more consolidation,” he said. “I think the players in Bermuda are looking to get together and I think that Lloyd’s is attractive for a lot of buyers. I know the valuations are high but I think that that is a place where there is a lot of interest.”

According to Gallant, the market should expect to see more buyers paying in excess of book value for Lloyd’s players as M&A fever begins to gather more pace.

As more re/insurers in the market continue to merge, it will likely spur on their competitors to do the same, in order to maintain their competitive advantage. The strong set of results many firms reported at the end of 2014 could also be add further fuel to the M&A fire.

Another potential factor that will likely drive more deals this year could be the rapid pace of market consolidation in late 2014 and early 2015.

Re/insurers are currently in a position where they are able to choose potential partners. However, some re/insurers could find themselves in a situation where they have a partner forced upon them.

This almost came to pass last year with Endurance’s failed bid for Aspen.

The Aspen leadership was vocal in its belief that Endurance would be the wrong deal for it. This argument eventually swayed the shareholders to reject the proposal from Endurance, following a series of ugly exchanges between Aspen chief executive Chris O’Kane and Endurance chairman and CEO John Charman.

However, what the process did show was that there was the potential for deals to be forced upon re/insurers via a hostile takeover.

Catlin chief executive Stephen Catlin admitted, following his company’s deal with XL Group, that the acquisition was at least partly driven by the rapid consolidation within the industry and the fact that XL was an attractive partner.

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