Bermuda's prominent position on the global reinsurance stage is keeping it at the heart of merger and acquisition activity across the sector

Bermuda has developed into a leading offshore financial services centre, with a thriving reinsurance industry recognised as one of the largest centres in the world. This success can be credited, in part, to its continued ability to adapt and meet the needs of the reinsurance market as a whole. Reinsurers from the UK and US, and from other established centres, are located in Bermuda because of the stability and efficiency of the market and its leading role in the growth and development of alternative capital models.

Such prominence means merger and acquisition activity continues. In recent years, there has been a steady stream of Bermuda reinsurer combinations. These transactions have involved mergers, amalgamations or acquisitions – two Bermuda reinsurers interested in growth and increased leverage, for example, or an acquisition by an external entity looking for a Bermuda platform.

Notable transactions include Partner Re's $2bn acquisition of Paris Re in July 2009; the merger of CNA Financial Corporation with Hardy Underwriting Bermuda for $230m in July 2012; the takeover of Flagstone Reinsurance Holdings by Validus Holdings for $623m in November 2012; the merger of Canopius Holdings Bermuda with US property and casualty insurer Tower Group for $480m in March 2013; Markel's takeover of Alterra Capital Holdings in May 2013 (which ranks as one of the largest at $3.1bn); and the acquisition by Fairfax Financial Holdings of American Safety International Holdings for $250m in September 2013.

Appetite for M&A

The appetite for reinsurance mergers and acquisitions continues to grow. According to a survey carried out by global professional services company Towers Watson in November 2013, 86% of US insurance executives expect to see an increase in insurance mergers and acquisitions over the next three years, while 78% are actively considering acquisitions.

The survey also found that insurers considering acquisitions had several areas of interest. Two-thirds were seeking an opportunistic purchase and more than half were interested in bolt-on acquisitions within an existing segment. A majority said they would focus on expansions into new markets, as well as pursuing acquisitions to extend their reach to new customer segments, distribution capabilities, product expertise and other operational capabilities.

Insurers participating in the survey cited a strategic intention to expand into new sectors, difficulties with organic growth and economies of scale as material factors driving further mergers and acquisitions.

Bermuda will continue to be a focus for such activity. This year's efforts by Bermuda-based property and casualty insurer Endurance Specialty Insurance to acquire competitor Aspen Insurance Holdings is the most recent example of mergers and acquisitions taking place for many of the reasons outlined by Towers Watson.

Aspen rejected Endurance's unsolicited bid of $3.2bn offer in cash and shares and, in turn, adopted a oneyear shareholder rights plan.

This very public confrontation between two high-profile Bermuda reinsurers has been played out in the press and in the courts.

Cash reserves

Consultancy Grant Thornton has attributed competing reinsurers' hefty cash reserves to the growth in merger and acquisition activity. Companies with strong balance sheets are looking to deploy capital for acquisitions to increase market share.

A continuing soft reinsurance market also keeps the sector ripe for consolidation, as reinsurers look to make greater efficiencies and cut costs. It is expected there will be an increase in consolidation, specifically involving insurers with relatively undifferentiated products, such as property and casualty, given the limited opportunities for organic growth in the sector.

Size has become an issue as smaller companies find it increasingly difficult to compete against larger players. The drive to become bigger will continue to fuel merger and acquisition activity.

There has also been a decrease in opportunity in the property and casualty reinsurance market as trends towards alternative reinsurance options put pressure on conventional reinsurers. This increased competition from alternative sources and shrinking opportunities for organic growth make growth through acquisitions or mergers a necessity if companies with a traditional reinsurance business model are to compete.

Capital inflow

The capital market's entrance into the reinsurance world – through the use of sidecars, catastrophe bonds, insurancelinked securities, collateralised reinsurance and retrocessional reinsurance – has been challenging for traditional insurers, making them more susceptible to acquisition.

There is a heightened threat from the insurance-linked securities market as it is inherently less expensive with a lower cost of capital on a fully collateralised basis.

One growing trend has been the interest shown by various capital market entities in acquiring traditional Bermuda reinsurers. The 2013 acquisition of SAC Re by Hamilton Insurance Group is a prime example of capital markets looking to establish a strong presence in the global reinsurance market by acquiring a Bermuda Class 4 reinsurer.

There is little doubt that Bermuda reinsurers are prominent players on the global stage. And with that status comes the pressure to compete and grow. Mergers and acquisitions will continue to be an attractive avenue for many Bermuda insurers looking to meet their challenges.

This status will also continue to encourage international insurers and capital markets players to seek to acquire Bermuda reinsurers as part of their strategic initiatives.

There is no way to know which Bermuda insurers will be next to enter the merger and acquisition arena, but it is only a matter of time. There are interesting times ahead.

Originally published Global Insurance Intelligence, Winter 2014

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