However, over the past several years, these discussions have become much more subdued as the reinsurance marketplace continues to be consolidated away.
First, a trip back in history. The 9/11 tragedy and the hurricanes of 2005 (Katrina, Rita and Wilma) resulted in several additions to the class of reinsurers hoping to provide perceived new capacity to the marketplace. Some had a simplistic model pursuing property-catastrophe risk, while others hoped for investment returns as a differentiator.
But the volatility in their results, coupled with the erosion of capital, led to pressure from regulators, investors, and/or rating agencies. They were essentially forced to the table.
Although some would argue otherwise, this dynamic has changed over the years. Perhaps a case of “survivor bias,” the handful of Bermudian standalone reinsurers left today are unlikely to be “forced to the table” in the same manner as the industry saw a decade ago.
This is in part due to how the reinsurance model has changed over the years.
When third-party capital entered the space in the early 2010s (see chart below), competition quickly drove down the double-digit returns that property catastrophe lines had provided. Without the property catastrophe returns subsidizing other reinsurance lines, carriers turned to a hybrid model – accepting lower returns for less volatility.
In our McKinsey-inspired piece, our analysis showed that if a company starts from a position of weakness, a revised business plan is still not enough for it to catch up with its peer group. This led to several members of the class of 2001/2005 eventually ending up on the deal table. It remains to be seen what the losses from Hurricane Ida end up being. However, with reinsurance capital continuing to grow and alternative capital continuing to pursue diversified returns, it might be a while before we see a similar wave of company formations.
Over the past 11 years or so, 17 reinsurers have been consolidated away. Most of them were forced to the deal table, although a few of them were strategic in nature. It is always interesting to go back and see how these deals were described to stakeholders, investors, and the marketplace. The chart below shows how the buyers described the deals. Of course, you are not going to say that the acquired company had the Damocles sword of relevancy hanging over their head.
Taking a step back, let's examine the real reasons why all the reinsurers disappeared.
Firstly, unfortunately, bigger is better.
Endurance, Montpelier, Aspen, PXRE, IPC Re, Flagstone, Max Capital, etc., and the list goes on. We anticipated that several of these smaller reinsurers would be nimble in reacting to market conditions and generate potentially higher returns vs the established carriers. However, the volatility in results, diminishing capital, and the ratings agency side-eye eventually led these companies to the deal table.
In the chart below, we see many previous acquisitions in the space centered around relatively inexpensive firms. These reinsurers were trading at below book value and were typically acquired by other reinsurers looking to achieve scale.
This included operational efficiencies and access to wider capital opportunities.
Unlike larger commercial insurers, in reinsurance, there are fewer expense synergies and more focus on capital allocation and deployment. The chart below shows that unsurprisingly very few acquisitions were at a significant premium to book. This also has implications for the remaining class and it does not offer deeply discounted valuations for potential capital or strategic partners.
Secondly, buyers were looking to change the narrative.
There’s nothing like a merger announcement to take the focus away from questions surrounding your business franchise. We saw this with AIG’s acquisition of Validus. Validus was not a natural fit for AIG, and AIG was further down the list of potential acquirers for Validus. Instead, it presented as an opportunity to change the narrative from the turnaround story AIG had been talking about for several years. However, in recent years, the rationale of this acquisition becomes less clear coupled with the continued drain of talent away from the franchise.
AIG is not the only company to attempt to reframe the narrative. Axis, a company that has struggled to find a seat at the relevancy table, acquired Novae in 2017. For several years before the acquisition, Axis had the highest combined ratio among its peer group. The Novae deal created additional questions about its legacy reserves, and the company had to put a band-aid on its problems in the form of a reinsurance-to-close deal. As one of the smaller publicly traded reinsurers, we would not be surprised to see it nudged back to the deal table.
Some other examples of reframing the narrative also include Endurance’s acquisition of Montpelier Re in 2015. The thought process was to attempt to create a bigger balance sheet and achieve scale, which was proving tough for them individually. Endurance was later itself acquired by Sompo, a foreign buyer which we cover in the next point.
SiriusPoint, born from the merger of Sirius and Third Point Re, is another example of reframing the narrative. Third Point Re and Greenlight Re were both formed to capitalize on the star power of their founders and enable tax arbitrage as well as have access to cheap reinsurance float. With investment returns proving to be elusive and star power waning for both Einhorn and Loeb, both reinsurance vehicles consistently traded at discounts to the peer group. We would not be surprised to see Greenlight pursue an exit strategy as well.
Thirdly, foreign buyers willing to pay up are mostly gone.
In the mid 2010s there was considerable interest from Japanese, European and Chinese buyers in the reinsurance space. This resulted in several take-outs as shown in the table above. After the Japanese, there was considerable discussion regarding interest from Chinese buyers. With tightening regulatory landscapes on both sides stemming from issues surrounding capital sourcing and origination, these buyers failed to materialize.
Although several European companies showed an interest, these were mostly strategic in nature. Most of the companies that could add some value have already been acquired.
These waves of consolidation leave five companies trading publicly. These include Axis Capital, RenaissanceRe, Arch Capital, Everest Re, and Greenlight Re.
Below we show their multiples. Amongst this cohort, Axis is the most likely, coming in at $4.4bn of market cap. Arch Capital at $16.5bn of market cap is a big company to merge with factoring in the control premium. Arch has also successfully made a transition to a multiline company including a strong mortgage insurance franchise. Therefore, there is no real need for Arch to go looking for a partner. Everest Re is another large reinsurer at a $10.6bn market cap.
Everest is currently in the middle of a revamp of its strategy under Juan Andrade (formerly of Chubb). Investors and stakeholders hold a positive view of the new management. The company is under no real pressure to seek partners.
Rounding out the group of remaining companies is Greenlight Re, which continues to trade at a discount. Perhaps Greenlight would also seek an exit similar to SiriusPoint, which, following its recent merger, is pivoting towards a more traditional model.
Gallagher, Jamie (US)
In summary, reinsurers that formed under the traditional model, which found itself highly susceptible to large losses, have largely been transformed (either through consolidation or organic growth) to more stable enterprises. And while the cycle of formation and consolidation is unlikely to repeat anytime soon, the remaining players do not face the level of urgency seen by companies already acquired in this space.
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