Sharp rise in insurance M&A

Insurance industry mergers and acquisitions have picked up dramatically in the first half of this year and dealmaking globally is expected to continue at an elevated pace, according to analysis by specialist law firm Clyde & Co.

The reinsurance sector and especially the Bermudan industry is likely to be a hotbed of activity as companies look to increase their scale and diversification to deal with rising regulatory costs and capital requirements as well as to create more robust balance sheets, according to the lawyers.

These concerns will be high on the agenda for the top reinsurance executives gathering in Monte Carlo for the annual Rendezvous event, which 10 years ago was in full swing when the September 11 terror attacks on the US took place. The destruction of the Twin Towers in New York that day in 2001 led not only to huge losses for the industry, but also to big changes in how it operated that are still evolving today.

Andrew Holderness, partner at Clyde & Co, said that while the number of deals globally had steadily declined through 2009 and 2010, the first half of this year saw a sharp jump to 290 deals globally from less than 250 in the second half of last year. In Europe, the first half of this year saw more deals than in the whole of 2010, he said.

“It is evident that mergers and acquisitions are back on the agenda of underwriting businesses,” he said. “Regulators and customers are looking for strength and stability...we expect to see continued activity across all types of transactions.”

This was particularly prevalent in the reinsurance business, Mr Holderness added, pointing to the development of the Bermudan industry since the wave of start-ups that were created in the aftermath of September 11 2001.

The so-called “class of 2001” was the most significant mass influx of new capital into the reinsurance industry ever seen, according to industry experts. But while $500m of capital was enough to make a company credible then, that figure is now between $3bn and $5bn.

The current three-way battle for Transatlantic Re in Bermuda is seen by bankers as heralding a potential increase in that capital floor and so a new round of consolidation.

However, others believe this will be hampered by poor valuations for reinsurers with many companies’ shares trading below their net asset values.

“Logically, there should be more consolidation, but if you look at valuations that limits what companies can do using their stock as a currency,” says Chris Klein at Guy Carpenter, the reinsurance division of brokers Marsh.