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Despite Validus' bid for Flagstone, few consolidation deals expected

M&A uptick possible, but stable market could deter deals

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MONTE CARLO, Monaco — Despite Validus Holdings Ltd.'s bid for rival reinsurer Flagstone Reinsurance Holdings S.A. late last month, there's unlikely to be a rash of other deals in the reinsurance industry during the next few months, most reinsurers, brokers and other experts say.

That's not to say that consolidation would not be a logical consequence of the plentiful capacity, low valuations of reinsurers and stagnating rates.

But few forces are compelling reinsurers, their boards and managements to look for merger or acquisition opportunities. Most reinsurers are performing moderately well and likely don't see a need to seek a buyer; and reinsurer stock prices are relatively low, which may limit reinsurers' ability to use their own stock to buy rivals, reinsurer executives say.

But a lack of organic growth could stimulate more M&As, some observers say.

The announcement by Validus a week prior to the Rendez-vous de Septembre of its proposed $620 million of Flagstone led to some speculation among participants at the annual meeting of reinsurance executives in Monte Carlo, Monaco, about the possibility of more deals being sealed over the next few years.

But many of the experts say they don't see a trend emerging.

Ed Noonan, chairman and CEO of Validus, said the Pembroke, Bermuda-based reinsurer, which has made several acquisitions since its formation in 2005, is not actively looking for further deals. But if a potential target operates in an area “we understand and do well in and it would help us grow our business, there's no reason why we shouldn't take it on,” he said.

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The Flagstone deal fits those criteria, as it would significantly increase Validus' size and add to its existing book of property catastrophe business, Mr. Noonan said.

“We can put the two portfolios together and put on hundreds of millions of dollars of catastrophe business. ... If you are in the catastrophe business, you want to be important to the sector because you want to offer comprehensive solutions to brokers and customers,” Mr. Noonan said.

The deal made financial sense for Validus, as it paid less than book value for Flagstone, and the deal will take its capital base to more than $4 billion, said Brian Schneider, senior director at Fitch Inc. in Chicago.

“There are a lot of benefits to scale in the property cat and Bermuda market generally,” he said. “At some point, the advantages of scale will drive fewer players in the Bermuda market.”

While more mergers and acquisitions may make economic sense, few deals are being completed, said David Priebe, vice chairman of Guy Carpenter & Co. in New York. “Buyers and sellers need to get to a point where it makes sense for both parties. They need the right cultural fit as well as the proper economic fit.”

The current trading values of reinsurers make deals harder to achieve, said Jamie Veghte, CEO of reinsurance operations at XL Group P.L.C.

With companies trading at less than book value, it makes it harder for them to complete deals, he said.

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In addition, several executives said that entrenched managements and entrenched boards on companies that are performing well financially are unlikely to aggressively pursue mergers or acquisitions.

But Paul Schultz, president of Aon Benfield Securities, a unit of London-based Aon P.L.C., said with organic growth hard to come by, acquisitive growth may be a more viable path for reinsurers. “To grow organically takes too long and is too expensive.”

“We believe this will be an active (season) for M&A. Funds from private equity will help drive the deals,” he said.

And some executives said there are business niches where they would be interested in completing a deal if a suitable target company were available.

“We are not looking for pure financial transactions at this point in time, but we would be interested in something on the life side, but not on the nonlife side, as we have good organic growth in that business,” said Ulrich Wallin, chairman of Hannover Reinsurance Co. A life reinsurer in Germany would be a particularly attractive acquisition target, he said.

Endurance Specialty Holdings Ltd. might be interested in buying a medical malpractice insurer that specializes in physicians, said David Cash, its Pembroke, Bermuda-based CEO.

“We have a large practice for large health care institutions, and they are increasingly employing physicians ... so it's a question of whether we grow that business ourselves or whether we buy,” he said.