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Reinsurers turn sexy as suitors see disaster-scarred targets
[NEW YORK] The US$500 billion reinsurance industry is experiencing a flurry of deal talks.
One reason: Companies are finally for sale as a rash of natural disasters has depressed valuations and a influx of competitors has made it harder to raise rates.
"When things are not for sale, nobody can buy," said John Marra, a partner in PwC's transaction-services practice. "You have a lot of willing sellers right now. They see complex deals getting done, they see big checks getting written."
From Bermuda to Switzerland, the reinsurance industry is luring interest from investors looking to generate returns. Swiss Re AG said Wednesday that it was in talks with SoftBank Group Corp's Masayoshi Son about the Japanese firm acquiring a stake. Germany's Allianz SE is among companies potentially interested in buying XL Group Ltd, people with knowledge of the matter said this week.
Reinsurers are essentially insurers for insurers, providing backstops to other companies while earning premiums that they can then use to invest elsewhere. In recent years, the business has seen a flood of new entrants - including hedge fund managers David Einhorn and Dan Loeb - with the injection of capital pushing down reinsurance rates and pressuring returns.
The ramped-up competition prompted Warren Buffett - whose Berkshire Hathaway Inc owns reinsurer General Re - to lament in 2016 that the industry's prospects had worsened.
Then came Harvey, Irma and Maria. Those storms led to the most expensive US hurricane season on record, and analysts waited to see if insurance losses would boost reinsurance rates. But prices rose less than expected, and those disasters compressed reinsurer valuations, helping drive some of the dealmaking, Wells Fargo & Co analyst Elyse Greenspan said.
XL was trading at less than its book value earlier this year, making it a prospect for a takeover.
Validus Holdings Ltd dealt with losses from three hurricanes and an earthquake in Mexico in the third quarter alone, helping reduce its price-to-book value. American International Group Inc agreed in January to buy the Bermuda-based reinsurer for US$5.56 billion in cash, a 46 per cent premium to the target company's closing price before the deal was announced.
Those catastrophe losses might spur more consolidation for Bermuda reinsurers this year, while the US tax overhaul has diluted the pricing advantage the companies enjoyed with Bermuda's low rate, according to a Fitch Ratings report.
It's difficult for Bermuda firms to "reduce prices or become more competitive, because they really haven't gained any more advantage," Fitch analyst Brian Schneider said Thursday in an interview. The US companies "have much more flexibility to do things with the extra returns they're getting from lower taxes."
SoftBank's Mr Son could be intrigued by the possibility of disruption in the insurance industry, said Wesley Lebeau, a portfolio manager at CPR Asset Management, whose fund owns shares of SoftBank. The Japanese company has taken stakes in operations including ride-hailing, chipmaking and office-sharing.
"Investing in an insurance firm is a way to integrate all their various ride-sharing and co-working space businesses, which will all disrupt insurance," Mr Lebeau said in an interview. "It's a way for insurance to reposition itself for these emerging risks." One of the industry's main attractions is something Mr Buffett refers to often: float. That's the money insurers collect in premiums, which they can invest while waiting to pay out claims.
"You can take risks on both sides of the balance sheet," Paul Newsome, a Sandler O'Neill & Partners LP analyst, said in an interview. "That's the basis for what Berkshire Hathaway does."
As a result, reinsurers are attracting a wide variety of potential buyers, PwC's Mr Marra said. Private equity firms, pension funds and family offices have been kicking the tires, as well as rival Asian firms looking to expand in the US and Bermuda.
"Because complex, significant, big-check transactions have gotten done, folks that might not have been a seller two, three, four years ago are entertaining deals because they think the right price can be achieved," Mr Marra said.