Consolidation: the implications for captives

In September 2013 Bermuda:Re+ILS, the sister publication of Bermuda Captive, published an article titled M&A: a limited appetite. It was based on a discussion I had with the publication about the desire for mergers and acquisitions within the Bermuda market and the recipe for successfully closing a deal.

At the time, I was of the view that there was an appetite for M&A but that it was not being satisfied—in the prior years there had been much discussion about the expected consolidation of the market but, apart from Validus Holdings’ acquisition of IPC Holdings in 2009 and the acquisition of Alterra Capital by Markel Corporation in 2013, there has been a limited number of deals in the Bermuda re/insurance market.

It would now appear that the hunger to do deals has finally got the better of the Bermuda re/insurance market and the anticipated trend towards consolidation has finally commenced. Endurance Specialty Holdings got the ball rolling by making a hostile takeover bid for Aspen in early 2014.

Although the bid was abandoned in July 2014, it would seem that Endurance’s unsuccessful attempt had the effect of stirring other players in the market to look for acquisition opportunities or merger partners (and/or to look over their shoulders to see who might be sizing them up for a transaction).

This year we have seen RenaissanceRe announce and complete (in March 2015) a $1.9 billion acquisition of Platinum Underwriters and XL Group close an agreed acquisition of Catlin Group Limited for $4.1 billion on May 1, 2015.

Axis Capital and PartnerRe have also agreed to combine in a $11 billion merger of equals and Endurance has returned to the market, this time with an agreed $1.8 billion deal to acquire Montpelier Re.

In addition, although hedge funds and others with capital have generally been accessing the re/insurance market via insurance-linked securities (ILS) vehicles, we are now seeing outside players looking to directly acquire existing re/insurers, which is demonstrated by Fosun International agreeing (in May 2015) to acquire the remaining 80 percent of Ironshore for $1.84 billion and Exor, one of PartnerRe’s founding investors, announcing in April 2015 a competing bid to acquire PartnerRe (an offer which has, so far, been rebuffed by PartnerRe’s board in favour of the merger with Axis Capital).

Cash in hand

The recent surge in activity is almost certainly the result of re/insurers having capital available to make acquisitions and the perception that existing insurers need to increase their critical mass and diversify business lines at a time when the catastrophe reinsurance market is getting increasingly competitive, with the introduction of alternative reinsurance capacity, in the form of ILS and cat bonds, and rates are softening.

In addition, there is a general perception that the valuations of insurers, although improving from the lows of 2011/12, are still relatively low compared to the book value of the businesses being acquired.

This consolidation trend, which looks like continuing for now, will no doubt have some negative impact upon Bermuda generally. The parties to the announced and/or completed transactions referred to above have all headlined the potential cost savings arising from the larger consolidated business as one of the principal drivers for the deals.

To a large degree, these cost savings will be satisfied by reducing jobs (and future employment opportunities) in Bermuda. This may result in the Island losing some of the valuable intellectual capital that has built up over the years as industry experts and thought leaders, including insurance executives, underwriters and actuaries, have relocated to Bermuda to satisfy the growing demand for insurance excellence.

There has been some suggestion that the consolidation could potentially affect the captive industry by reducing access to fronting insurers and providers of reinsurance business and increasing the costs of accessing such services.

However, with the continued growth of the ILS market, as the convergence of the capital markets and the insurance industry continues, there is no doubt that a broader range of reinsurance players is competing for business with the traditional reinsurers and we would expect that captives will still be able to access reinsurance business at competitive prices.

As long as there is a significant amount of excess capital in the market, it appears very unlikely that reinsurance premiums are likely to increase materially in the short term.

At the same time, it should be recognised that consolidation is a function of market forces and will have the effect of ensuring the continuing strength of the worldwide reinsurance pool. Like all consumers of insurance, captive owners and their captives should benefit.

Ernest Morrison is the managing director of Cox Hallett Wilkinson. He can be contacted at: emorrison@chw.com