For the first half of 2015, global merger and acquisition (M&A) activity in the property/casualty and reinsurance industries have seen a huge spike in in terms of both deal activity and announced deal values from already historical levels.
In a report issued by A.M. Best, it was noted that deal values were up 290% from the first half of 2014, and up more than 90% from the second half of 2014, to a high of US$21 billion. Deal count was up 73% to 76 announced transactions, up from 44 from the first half of 2014. In addition to deal count, average deal size was up 160% from the first half of 2014, with deals averaging $725 million, compared to $279 million in the first half of 2014.
A.M. Best noted several drivers pushing deal activity in the global P&C segment which included increased capital efficiency and scale to drive down costs through synergies; consolidation to increase the buying power of pricing and terms and conditions; diversified product lines and reduced exposure to market cycles and improved growth; cheaper funding (low interest rates, high stock prices, cash on hand); vertically integrated and enhanced distribution channels; increased availability and, sometimes non-traditional, sources of capital; and a general fear of being left behind.
Reinsurers pursue consolidation
As primary companies consolidate to broaden their product line capabilities and better insulate themselves from the cyclicality of a specific class of business, so too are reinsurers. The days of being a mono-line reinsurer with a specialisation in property catastrophe reinsurance seem to be numbered, said A.M. Best.
A combination of changing customer needs and increased participation of the capital markets in the property reinsurance space are two of the major challenges facing the traditional reinsurance model. As a result, some of the larger merger and acquisition deals that occurred or are in the process of closing are in this sector of the P&C market.
Another change is the low growth environment as primary companies continue to cede fewer premiums in order to retain more of their own profitable business given that the market has seen no significant amount of CAT losses over the past few years, leading to a decline in reinsurance demand.
The AXIS/Partner Re/Exor saga
The report cited Exor SpA’s $6.9 billion acquisition of PartnerRe as an example of “just how far companies will go to increase their global reach”.
The original proposed mega-merger of AXIS Capital and PartnerRe in the reinsurance market was expected to combine the two companies to become a top 5 reinsurer with total premiums over $10 billion and a total capital position of over $14 billion and an invested portfolio of $33 billion.
Although the AXIS Capital deal originally was accepted by PartnerRe management, Exor SpA made several increasingly lucrative hostile offers eclipsing the monetary value of the Axis Capital offer. The final offer from Exor was ultimately accepted after a proxy advisory company recommended shareholders vote in favour of the Exor offer. However, the report noted that “this may not be the end of the discussion as shareholders are still set to vote on the final Exor offer.”
“It is also worth noting that one of these buyers will walk away without PartnerRe, and may pursue another strategic acquisition in the insurance segment, which means we may see additional large transactions announced in the near future,” said A.M. Best.
Notable deals
The Axis/PartnerRe/Exor triangle was far from the only large M&A activity in the reinsurance sector during the first half of the year. Endurance announced a $1.8 billion acquisition of Montpelier in a cash and stock deal. The combined entity will have over $3.6 billion in annual gross premiums and will seek to capitalise on its combined distribution channels across Lloyd’s markets.
In Asia, Anbang Insurance continued its buying spree, acquiring REAAL for $170 million. This marked the first time a Chinese company has entered the Dutch insurance market. Also expanding its global footprint was Tokio Marine Holding. The Japanese insurer acquired HCC Insurance for $7.5 billion or a 38% premium to HCC’s publicly traded shares. Tokio Marine noted that the businesses were largely uncorrelated and the need to move away from catastrophe exposure segments and diversify business lines globally was the rationale for the purchase.
In May, Fosun announced the acquisition of Ironshore Inc from private equity companies Irving Place Capital and Calera Capital Advisors, as they sought to exit their positions. Fosun moved to make insurance one of the conglomerate’s main businesses and sought synergies in prevention of currency risk and asset allocation.
Record year for mega-deals
Overall, A.M. Best said 2015 looks to be a record year for M&A in the insurance industry and has already exceeded the combined value of the last several years. Citing another example, the ratings agency said the Chubb/ACE deal recently announced represents one of the largest insurance M&A deals in history and the $29 billion deal will elevate two dominant companies into elite status in many of their markets.
“The Chubb/ACE combination somewhat changes the paradigm for recent deals as it combines two solid franchises to form a global powerhouse with a broad US market footprint. A.M. Best expects to see a continuation of M&A activity with insurers, focused on underwriting fundamentals and the accumulation of insurance risk.”