NEWS OPINION

Mergers and acquisitions developments Arrival of the expected have emerged during 2015, including the adequate return on capital. Exor’s offer M&A wave? motivations for Fairfax and Brit, Fosun and to acquire PartnerRe is an example of New capital inflows, excess capacity and Ironshore/Meadowbrook, Exor’s bid for a knowledgeable investor identifying benign catastrophe loss activity have PartnerRe and China Minsheng’s bid for reinsurance market returns as an attractive contributed to falling (re)insurance prices Sirius. In each of these cases, the deal is not opportunity relative to the yields available and a challenging environment for specialty driven by consolidation synergies but rather elsewhere, despite current soft market (re)insurers. These combined factors have by recognition of the inherent attractiveness conditions. been the rationale for predictions of a wave of the target’s business model and ability to Similarly, the use of investment float has of market consolidation, which appear generate an acceptable investor return on been a long-term feature of the market. to have become a reality during 2015 as capital within a diversified portfolio. However, the proliferation of the new a series of rumours and announcements While most of the high-profile transactions hedge fund reinsurance model, as well as grabbed the headlines. announced to date are a response to the the strong interest from the Chinese funds challenges in the reinsurance market, more with substantial capital resources and a Cyclical drivers of M&A activity recent announcements such as Ace and desire to diversify and grow assets under (the anti-correlation thesis) Chubb, Tokio Marine and HCC, and Zurich’s management, has created a much greater Reducing profit margins and a history approach for RSA demonstrate that the pick- focus on generating returns from the of pulsing rate cyclicality may create the up in M&A activity is now flowing over to the investment float than the market mean. impression that now should be the time specialty and broader insurance markets. These acquirers exhibit a lower to batten down the hatches and wait for requirement for underwriting return the storm to pass. That conclusion fails to Disruptive forces to M&A activity than normally assumed. They can acknowledge the behaviours and economics The reality is that many external forces effectively compete in soft markets for that drive the insurance cycle. The accepted disrupt the insurance pricing cycle’s M&A transactions with traditional market presumption is that there is a rational anti- impact on M&A activity. In recent years the consolidators despite not accessing the correlation between the market pricing (re)insurance markets have been influenced benefit of underwriting synergies. cycle and M&A activity, with soft market by financial market conditions, new conditions leading to heightened activity investors, globalisation and the benefits of Solid financial results and valuation multiples. healthy underwriting profits despite rate despite soft market rates A study of the stages of the insurance cycle softening. The combined impact of reserve releases, and the resulting drivers of M&A transactions a benign loss environment, escalating reveals that in hard markets it is likely that Capital markets conditions solvency capital requirements and more the demand for M&A would be inhibited by Insurance company valuations have in recent robust balance sheets have helped to the strong inherent profitability of market years shown substantial appreciation. Given cushion the impact of the softening cycle participants and continued potential to the soft premium rates and low investment and hence delay the onset of M&A pressures. achieve attractive organic growth without yields, the heightened valuations can be However, these delaying influences cannot the risks associated with an acquisition. attributed principally to broader market be expected to endure. It is reasonable A symptom of soft markets is that the sentiment, but also to the anticipated M&A to anticipate that the declining rate and lower underwriting margin environment activity within insurance markets. The raised low investment yield environments will substantially challenges a business’s ability valuations and liquid capital markets have eventually be realised more fully in financial to maintain returns and deploy surplus provided improved access to transaction results. capital through organic growth. While financing. a number of strategies are available to Future outlook for M&A activity optimise the capital base to reflect these Impact of ‘alternative capital’ We are in a complex and changing challenges, many businesses are attracted in the reinsurance market environment, where macroeconomic to the alternative routes of deploying excess The flow of alternative capital into the developments, the pricing cycle, a wide array capital and achieving synergies through reinsurance markets has been sustained of sources of capital, globalisation and the acquisition. and substantial. It is likely that the benign catastrophe loss environment are all increased fluidity of capital in the sector strong and interconnected influences. Current drivers of M&A activity simply accelerated the development of With these dynamics in place, absent a A review of M&A activity in the US the challenging market and the onset of major market catalyst or macro-environment specialty insurance market and the global consolidation activity. event, we can reasonably expect a continued reinsurance market does support this proliferation of M&A activity in the specialty anti-correlation thesis. However, while the Capital with alternative strategic interests (re)insurance markets. strategic rationales for many of the recently competing for M&A opportunities announced transactions support this thesis, Other investors that have entered the Andrew Beecroft it is also noteworthy that the synergies of (re)insurance market via acquisition have Managing Director, consolidation are not the only drivers of blurred the anti-correlation theory’s GC Securities* M&A activity. parameter of the required level of *Securities offered in US by GC Securities, a division of A number of other strategic rationales underwriting margin to generate an MMC Securities Corp, member FINRA/NFA/SIPC

DAY 4: WEDNESDAY 31