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Buyers, sellers at a standoff in reinsurer M&A market

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Buyers, sellers at a standoff in reinsurer M&A market

Despite the takeover battle still raging over Transatlantic Holdings Inc., there have been few mergers and acquisitions this year involving U.S. or Bermuda-based reinsurers, and it looks unlikely that the market will heat up anytime soon.

With a weak economy, soft pricing for most noncatastrophe coverage lines and limited investment gains, reinsurers' stock prices remain subdued, marking them as possible bargains for investors or rival reinsurers.

But there often is too wide a disparity between what stockholders perceive as the true value of their holdings and what prospective buyers are prepared to pay.

“Everyone wants to be a buyer, but nobody wants to sell,” said John Andre, group vp at Oldwick, N.J.-based rating agency A.M. Best Co. Inc. “Based on current reinsurance and financial market conditions, we don't see a lot changing.”

For example, Montpelier Re Holdings Ltd. in recent years has considered buying a Lloyd's of London platform to expand the Bermuda-based reinsurer's existing offerings in the London market. But the owners of syndicates that were approached would sell only at a significant premium over their book value, despite their depressed share prices.

Book value is a measurement used to determine the actual asset value of a company. According to analysts, many reinsurers are trading at about 70% of their book value.

“It's hard to justify the prices people were looking for at the end of the day,” said Montpelier Re Treasurer Bill Pollett. Meanwhile, it can make more sense to buy shares back, rather than invest in acquisitions, when they're trading so cheaply, he said.

The difficult operating environment and general macroeconomic uncertainty provide further hurdles. For example, uncertainty exists around the timing of a market turn that would lead to higher prices, volatility in global equity markets and the declining availability of reserve releases.

Management teams are “extremely cautious when pursuing M&As,” Christopher Ezbiansky, New York-based managing director and head of M&A advisory-Americas at GC Securities, the investment banking arm of reinsurer Guy Carpenter & Co. L.L.C., said in an email.

“If there was a huge opportunity in the market, I'd imagine (potential buyers) would want to pay more” for reinsurers than what they're currently offering, said John Andre, group vp at Oldwick, N.J.-based rating agency A.M. Best Co. Inc. “But they probably don't see the market opportunity. They're interested, but only at a certain price.”

Only two mergers and acquisitions have occurred so far this year involving U.S.- or Bermuda-based property/casualty or multiline reinsurers, according to SNL Financial L.C. And both of those deals were for reinsurers already in runoff. This compares with five deals in 2010, three of which involved companies in runoff.

In May, New York-based Cowen Group Inc. subsidiary Ramius Enterprise Luxembourg Holdco S.a.r.l. bought Luxembourg-based reinsurer Bel Re S.A. from Belgian financial firm Ethias S.A. for about e208.3 million ($289.2 million).

Meanwhile Hamilton-based Catalina Holdings (Bermuda) Ltd. in May completed its acquisition of Pfäffikon, Switzerland-based Glacier Reinsurance A.G. Catalina said it paid less than net asset value for Glacier.

The one takeover battle for an ongoing reinsurer in 2011 has been for New York-based Transatlantic, and it is still unclear whether a deal will be completed. Transatlantic's stock has been trading at a significant discount in recent months, despite the reinsurer's strong financial position.

When Transatlantic in June announced a merger with Zug, Switzerland-based Allied World Assurance Co., it triggered more bids. That includes bids by Bermuda-based Validus Holdings Ltd. and Omaha, Neb.-based Berkshire Hathaway Inc.'s National Indemnity Co. reinsurance unit, as well as two undisclosed suitors—reportedly Hamilton, Bermuda-based runoff manager Enstar Group Ltd. and New York-based insurer C.V. Starr & Co.—and a group of investors that includes former Gen Re Corp. CEO Joseph Brandon.

But Berkshire's offer of $52 per share represented only 77% of Transatlantic's stated June 30 book value; the New York-based reinsurer refused to accept the price and Berkshire said it would not increase its offer. Meanwhile, Allied World's all-stock deal collapsed in September, and Validus' stock-and-cash bids fluctuated with the equity markets. In the meantime, Transatlantic in September began a share buy-back program.

When Transatlantic said this month that it had entered into talks with its fourth potential bidder, the reinsurer also added that “there can be no assurance that these discussions will result in a proposal or a transaction.”

In another indication of the difficult M&A market, Global Indemnity P.L.C. decided to remain independent after announcing in September that it had completed evaluating its strategic alternatives, which included a possible sale. The Dublin-based company has reinsurance operations in Ireland, the United States and Bermuda.

“That could be an indication of the market right now,” said Tom Mason, an analyst at SNL Financial in Charlottesville, Va.

Most experts say they expect the trend will continue through 2012.

“A change in (reinsurer stock) valuations could add a different element to the pace,” said Laline Carvalho, director and sector specialist in reinsurance at Standard & Poor's Corp. in New York. “I think it's likely to continue this way, with not too many deals per year.”