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Competitive pressures in reinsurance sector drive mergers and acquisitions

Posted On: Apr. 12, 2015 12:00 AM CST

Competitive pressures in reinsurance sector drive mergers and acquisitions

Competitive pressures in the reinsurance sector have again driven a merger among two smaller players striving to remain relevant.

At the same time, the sector saw the formation of a potentially powerful new vehicle that could ratchet up those pressures even further.

Endurance Specialty Holdings Ltd.'s $1.83 billion purchase of Montpelier Re Holdings Ltd., announced late last month, will likely help both companies move forward, according to analysts.

The cash-and-stock deal, the latest consolidation move in the Bermuda reinsurance sector, comes nearly a year after Endurance failed to acquire rival Aspen Insurance Holdings Ltd.

Pembroke, Bermuda-based Endurance was known to be looking for an acquisition after failing to buy Aspen, and as one of the smaller Bermuda-based reinsurers, Montpelier was perhaps more vulnerable to takeover.

“There was a lot of strategic value rationale behind the attempt for Aspen” in terms of building scale, and buying Montpelier accomplishes that, although in a “Plan B” manner, said Meyer Shields, managing director with Keefe, Bruyette & Woods Inc. in Baltimore.

The deal allows Montpelier a more promising future at a time when property cat reinsurance rates are tumbling.

“Montpelier, because of its size and focus specifically on property and catastrophe, wasn't really viable, so they've been able to monetize the business they've assembled,” said Mr. Shields.

Mr. Shields, however, left the door open to even further acquisitions by Endurance.

“I think this is best viewed as an intermediate step in the hopes of achieving even more scale maybe a year or two down the line,” depending on what becomes available, said Mr. Shields.

Montpelier shareholders will receive 0.472 Endurance share and $9.89 in cash for each share held, representing $40.24 per share for Montpelier, also based in Pembroke. Monpelier stock closed at $39.61 on Aprilc 10.

The deal gives Endurance the option to build out its Lloyd's of London business while giving Montpelier an exit at a nice multiple to book value, said Amit Kumar, New York-based vice president and senior analyst of insurance at Macquarie Capital (USA) Inc.

“This is the new normal, where the financial component of these deals is attractive, focusing on reducing expenses and generating more capital flexibility. This is a good-enough deal,” said Mr. Kumar.

Between Endurance's previous acquisition attempt and talk of Montpelier's future, the deal did not take analysts by surprise.

Montpelier was widely known to be up for sale and John Charman, the chairman and CEO of Endurance, was known to be looking for a buy, Mr. Kumar said.

Because Endurance had been active in seeking acquisitions, their interest in Montpelier was not a surprise, according to Jim Auden, Chicago-based managing director with Fitch Rating Services Inc.

The deal also follows a trend of buyers gaining access to Lloyd's markets through acquisitions. With Montpelier, Endurance gets a Lloyd's platform, the third such deal recently.

Fairfax Financial Holdings Ltd. announced in February it would buy Brit P.L.C. for about $1.88 billion, and XL Group P.L.C. acquired Catlin Group Ltd. for $4.22 billion in January.

The Endurance deal consists of $450 million in cash and about 21.5 million Endurance shares, and Montpelier's shareholders will own about 32% of the combined company.

The deal is expected to close in the third quarter of 2015, the companies said.

Meanwhile, Ace Ltd. and investment bank Blackrock Inc. have launched a joint reinsurance venture, ABR Reinsurance Ltd., putting more pressure on the reinsurance sector.

ABR Reinsurance Capital Holdings Ltd., ABR Re's parent company, will be initially capitalized at between $800 million and $1.3 billion, according to recent documents filed with the U.S. Securities and Exchange Commission, and has thus far raised some $800 million in a private placement, according to Ace.

ABR will write a portion of the risks Ace currently places in the traditional reinsurance market and Blackrock will manage the investments.

The arrangement may spell trouble for traditional reinsurers in an already competitive market.

“When you've got a very large reinsurance buyer saying it has found another alternative to traditional markets, I think it's an enormous challenge that the reinsurers overall have to contend with,” said Mr. Shields, calling the move potentially “devastating” for the traditional reinsurance industry.

“Where the shake-up may be is in terms of another vehicle that traditional reinsurers will have to compete with to get on Ace's reinsurance panel, given ABR Re will only be assuming Ace's business over the intermediate term, “ said Tracy Dolin-Benguigui, New York-based director of North American insurance financial services ratings for Standard & Poor's Corp.

“I think it definitely has the potential to change things in the industry. I think it puts even more pressure on the reinsurance business, which was already under a lot,” said Cliff Gallant, an analyst with Nomura Securities International Inc. in San Francisco.

Sources agreed that the arrangement could reduce Ace's costs in ceding risks, as they no longer have to pay external, traditional reinsurers to cede such risks.

Further, the move could easily spawn copycats.

“I think you'll see other companies say, "If this works for Ace, we can try it as well,'” Mr. Shields said. “I can't see why they wouldn't, frankly.

Ms. Dolin-Benguigui also said she would not be surprised to see similar “copycats” coming to the market in the future.

“I think that's why ABR Re becomes important, because as Ace grows it, if they're successful with it, I would think other companies would consider doing similar types of structures. It could be a harbinger of things to come,” Mr. Gallant said.