More M&A makes sense - but it probably won’t happen, say CEOs
There are many good reasons why there should be more mergers and acquisitions (M&A) in the Bermuda insurance market - but don't expect to see a wave of consolidation.
That was the consensus view of a CEO panel at the Ernst & Young Property/Casualty Year-end Outlook conference last week.
Alterra Capital Holdings CEO Marty Becker, whose company was formed by the “merger of equals” between Max Capital and Harbor Point earlier this year, said more M&A made sense on paper, but it was tough to execute.
“If you intellectually think about M&A, there's a lot of reasons why there ought to be more, and frankly a little more M&A would probably be healthy for the market, in terms of the classic supply and demand equation,” Mr Becker said at the Ernst & Young Property/Casualty Year-end Outlook conference last week.
In the case of the Alterra deal, Mr Becker said the integration between the combined entity had gone well, but conceded that “the jury was still out” in terms of investors.
“Our stock's about where it was when we did the transaction,” Mr Becker said. “Is it going to be worth more? We really think it will be, we think we've got a much better platform, we make a much more compelling case for people to do business with, with the additional scale on the balance sheet.
“We do have more underwriting depth than we did before, but the outside world hasn't paid us for it yet.”
Platinum Underwriters CEO Michael Price said the overcapitalised insurance industry needed more M&A, but that it was unlikely to occur.
“I think we have an opportunity to consolidate in this industry and achieve two major financial objectives,” Mr Price said. “One is to remove duplicative costs from the system and the other is to gain capital efficiency and to return excess capital to shareholders.
“I don't think it will develop into a wave of M&A, despite the fact that it should, it won't. The Validus acquisition of IPC made a lot of sense to me. You eliminated expense, you took capacity out of the market. We need more of that, but I don't think it's coming.”
The fact that most Bermuda re/insurers were trading below book value did not help the chances of consolidation, Mr Becker said.
“When you're trading at 80 percent of book value, then M&A is really tough, because sellers don't want to sell at those prices and buyers can't afford to pay much of a premium,” the Alterra CEO said.
He added that most of the M&A activity in the industry this year had involved smaller companies being acquired for cash, an opportunity that was shrinking.
“The challenge is smaller entities are getting fewer and fewer,” Mr Becker said. “If you're looking in the US today for a company of anything under a billion dollars, then your list might have 20 names on it, maybe 15.
“Half of those are in business lines you don't want, or businesses that you don't think are that attractive. So M&A is easy to intellectually think about, it's tough to execute.”