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AM Best says more insurance mergers likely

The ‘merger mania’ that has swept through the Bermuda insurance market is unlikely to let up any time soon, according to a special report by AM Best.

The New Jersey-based credit rating agency argues that more takeovers are likely, driven by soft market conditions and weak investment returns in the low interest rate environment.

Bes notes there has been a trend of large companies merging with each other. “These deals have the ability to change the landscape of the (re)insurance market, squeezing businesses that lack niche product differentiation,” the special report noted.

Best said while the pressure on investment returns from low interest rates was a driver of merger activity, the low rates also served as an enabler, in that they have allowed cheap borrowing to finance deals.

The rating agency cited deployment of excess capital, scale and product diversification, geographic expansion, and cost savings as advantages sought by consolidators.

Best said it expected stronger specialist players to be the most attractive to acquirers, especially those in the Lloyd’s of London market.

“Although the wave of transactions has already caused some Lloyd’s participants to trade at high prices to net tangible assets, Lloyd’s’ capital-efficient structure and international licences have attracted trade and private-equity buyers, with the acquisition of an existing managing agent still regarded as the most straightforward way to access the market.

Best points out that consolidation can create larger, more competitive companies, but merging entailed considerable risks. These included overpaying for an acquisition, the challenges of integration, and unforeseen risks such as legacy reserve issues.

Diversification can also lead to companies going into lines of business in which they may lack underwriting expertise, Best said.

“AM Best notes that trying to expand a niche to other territories or related classes of business quickly has been the downfall of many companies, resulting in significant downgrades and insolvencies — particularly following the last significant soft market from 1998-2002.”

Bermuda has been bubbling with mergers and acquisitions (M&A) activity this year. In March, RenaissanceRe acquired Platinum Underwriters for $1.9 billion, and during the same month Endurance announced its $1.8 billion buyout of Montpelier Re.

In May, XL Group completed its $4.1 billion takeover of Catlin and Chinese investment firm Fosun International announced a $1.8 billion deal to acquire Bermuda insurer Ironshore.

Ace pulled off the biggest deal of all, agreeing earlier this month to buy The Chubb Corporation in a transaction worth $28.3 billion.

Another deal is very much in play, involving PartnerRe, whose agreement to merge with Axis Capital is threatened by a rival bid by Italian investment firm Exor. PartnerRe shareholders will vote on the Axis proposal on August 7.

Best said the losers amid the spate of takeover deals will be smaller insurers and brokers, especially those without particular expertise.

“Smaller reinsurers will continue to struggle as dominant companies can have more influence on terms and conditions or can steer business towards an affiliate,” Best’s report stated.

“The policyholder theoretically will have less choice from an insurance provider, but at the same time can benefit from greater security through the purchase of protection from a stronger, financially sound entity with highly refined underwriting ability and product offerings.”