Reinsurance Executives Say M&A Appetite Subdued Amid Crisis
Executives from reinsurers including Swiss Re Ltd. (SREN) and Allianz Re said the industry’s appetite for mergers and acquisitions will be subdued this year because of the financial crisis.
“Today’s buyers are very pragmatic and analytical about deals and aren’t prepared to offer unreasonably high prices, disappointing the seller, which ends in very long discussions,” Thierry Leger, a member of the group management board at Zurich- based Swiss Re, said at a roundtable of reinsurance executives organized by Bloomberg News in Zurich. “Otherwise some of the assets would already now have been sold.”
Reinsurers sit on record capital buffers, reluctant to spend the money on underwriting where they’re not getting the price they need for it to be profitable. That’s paving the way for possible share buybacks or higher dividends. Global capital reached $480 billion at the end of June, according to a report by Aon Benfield, the reinsurance broker of Aon Plc. (AON)
“Generally, share buybacks or dividends would be better than exposing capital to underpriced risk,” said Amer Ahmed, chief executive officer of Allianz Re, the reinsurance arm of Munich-based Allianz SE, Europe’s biggest insurer.
Munich Re, Swiss Re and Hannover Re, Europe’s biggest reinsurers, are using last year’s record catastrophes including the earthquake and tsunami that hit Japan and the flooding in Thailand to push through higher prices for their coverage. At the same time, capital increased and has returned to the peak levels seen in 2010.
“Companies under pressure make divestments, as it is a source of getting capital,” Swiss Re’s Leger said. The reinsurer would prefer deploying capital in its business rather than spending it on M&A and buybacks, he said.
Validus Holdings Ltd. (VR), based in Bermuda, agreed last month to acquire Luxembourg-based Flagstone Reinsurance Holdings SA. (FSR) Mid-size reinsurers have been combining to diversify their business mix and enable the companies to take on larger risks from primary insurers. Validus last year was among bidders for Transatlantic Holdings Inc., which was purchased by Alleghany Corp. In 2009, Validus bought IPC Holdings Ltd.
“Flagstone Re was extremely tempting as you could buy them book below value,” Ulrich Wallin, chief executive officer of Hannover Re, the world’s fourth-biggest reinsurer, said at a press conference in Monte Carlo today. “We also looked at it, and while it was financially attractive, for us strategically it wasn’t attractive at all. We are not pursuing major acquisitions in non-life reinsurance as we already have a good organic growth in the business.”
Assicurazioni Generali SpA (G) plans to seek a buyer for its U.S. life-reinsurance business as CEO Mario Greco works to restore the profitability of Italy’s biggest insurer, people familiar with the process said last month. Generali has hired Citigroup Inc. (C) to advise on a sale of Generali USA Life Reassurance Co. and the unit may be worth $800 million to $1 billion, said the people, who asked not to be identified because the process is private.
In another deal focusing on life reinsurance, Paris-based Scor SE (SCR) agreed last year to buy the mortality risk reinsurance business of Aegon NV’s Transamerica unit for $912.5 million. Hannover Re, Germany’s second-biggest reinsurer, agreed in 2009 to take over Scottish Re Group’s business of reinsuring U.S. life-reinsurance policies written by ING Groep NV. (INGA)
“There is healthy pressure from shareholders to think about what to do with the capital if companies cannot deploy it,” Swiss Re’s Leger said. “We believe strongly that we can deploy it. We see opportunities.”
Swiss Re reported last month that profit fell 91 percent to $83 million in the second quarter as the Zurich-based reinsurer booked a $1 billion loss in the quarter after agreeing to sell its U.S. Admin Re holding company to Prudential Plc. (PRU) The company has said it plans to double the size of its corporate solutions business, which sells direct insurance to companies, by 2015.
“With less-than-attractive valuations for many reinsurers, we expect a very active capital-management strategy with a number of share buybacks,” David Priebe, vice chairman of Guy Carpenter, the reinsurance broker of Marsh & McLennan Cos. (MMC), said in Monte Carlo. “If you’re not trading above book value, it’s difficult to make an acquisition accretive.”
The Stoxx 600 Insurance Index (SXIP) is currently valued at 0.86 times its companies’ book value, or firms’ assets minus liabilities. That compares with an average book value of 1.20 for members of the comparable utilities index and 1.48 for the telecoms benchmark.
At the same time, investors may prefer to put their money in other industries, said Hans-Joachim Guenther, chief underwriting officer and head of reinsurance for Europe and Asia at Bermuda-based Endurance Specialty Holdings, Ltd.
“We run a pretty volatile business model and our aim is to remain capitalized at a level sufficient to sustain the next foreseeable big hit,” he said. “At the moment, our industry is not overly sexy to investors.”