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Reinsurer mergers and acquisitions likely to rise on softening market

Reinsurer mergers and acquisitions likely to rise on softening market

The reinsurance industry is likely to see more mergers and acquisitions in the coming months as firms seek to grow in a generally soft market and put excess capital to work.

Larger reinsurers may acquire smaller companies — including direct insurers — to expand product lines or geographic scope, while smaller reinsurers may combine to better compete with larger players, industry sources say.

“If you want growth and can't get it organically, you are looking at acquisitions,” said Steven K. Bolland, New York-based managing director of Marsh, Berry & Co. Inc. and the former president of Gill & Roeser Inc., which MarshBerry acquired in July.

“We do expect increasing levels of M&A,” said Brian Schneider, senior director of insurance at Fitch Ratings Inc. in Chicago, “but we've been expecting that for a while.”

Impediments that slowed dealmaking in recent years remain, including management concerns about job security after a merger, and integration and regulatory risks. Hostile takeover bids have been rare, and experts differ on whether they may increase following Endurance Specialty Holdings Ltd.'s failed bid for Aspen Insurance Holdings Ltd.

While reinsurer acquisitions in the past two years generally have been small — many involving runoff operations — others have aimed to expand a reinsurer's geographical footprint and add profitable lines of business.

Bermuda-based Validus Insurance Holdings Ltd., for example, is in the process of buying Franklin Lakes, New Jersey-based specialty insurer Western World Insurance Group Inc., giving it a U.S. distribution platform; last year, Validus bought Longhorn Re, a Bermuda-based crop reinsurer. Similarly, Scor S.E. of Paris last year acquired Generali Group's U.S. life reinsurance business and Bermuda-based PartnerRe Ltd. purchased San Francisco-based accident and health underwriter Presidio Reinsurance Group.

Such deals may become more frequent as excess reinsurance capacity and shrinking demand pressure pricing and reinsurers' bottom lines, observers say. Reinsurance capital hit a record $555 billion at the end of the first quarter of 2014, and alternative capital continues to flow into the market, including a record $4.5 billion in catastrophe bonds in the second quarter of 2014, most covering hurricane and earthquake risks, ac-cording to Aon Benfield Group Ltd.

Ceding insurers, meanwhile, have become more efficient in consolidating their global reinsurance programs, reducing demand and further pressuring rates, said Jason Porter, director and credit analyst at Standard & Poor's Corp. in New York.

Smaller companies writing especially competitive lines, such as property catastrophe reinsurance, face not only dropping rates but also ongoing costs of modeling and other client services that larger reinsurers can absorb more easily, sources say.

Reinsurers have responded in recent years by using excess capital to buy back billions of dollars of their own shares. But as reinsurer stock values have climbed, buybacks have become less attractive and acquisitions potentially more so, Mr. Schneider said.

“As those valuations continue to increase, (there) could be a trend to greater flexibility to use stock for acquisitions,” he said.

Still, potential M&As face hurdles: “While a lot of underlying forces support M&A, there are a lot of obstacles, too,” said Kevin Lee, senior credit officer at Moody's Investors Service Inc. in New York.

One hurdle is a reluctance of top management to potentially lose their positions, even if a takeover makes sense for the company.

“If you sell your company, are you going to have a job? If you don't, where do you go?” Mr. Bolland said.

“The music stops, and there are only so many chairs,” said John Wicher, principal of San Francisco-based advisory firm John Wicher & Associates.

Deals also face integration risks, such as combining different underwriting cultures, and regulatory risks, including Solvency II standards, sources say.

The best merger candidates, observers say, are willing partners with complementary business lines whose post-merger management structure is agreed to in advance.

“Those are the types (of deals) that are more likely to have success going forward,” Mr. Schneider said.

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