Analysts expect M&A in the Bermuda insurance and reinsurance market to continue after a busy 2018.
The year's biggest deals were French insurance powerhouse Axa's $15.4 billion swoop for XL Group Ltd., the largest listed Bermudian firm by 2017 gross written premium, and American International Group Inc.'s $5.54 billion acquisition of Validus Holdings Ltd. Bermudian firms have been predators as well as prey, with RenaissanceRe Holdings Ltd. agreeing Oct. 30 to buy Switzerland-based Tokio Millennium Re, which itself started life on Bermuda in 2000.
Although many of the larger, higher-quality companies have already been snapped up and there is a limited number of independent companies left to buy, Brian Schneider, a senior director at Fitch Ratings, said in an interview: "I think all of the remaining companies have been considering whether [mergers and acquisitions] is something they want to do."
'Difficult' environment
Schneider noted that Bermuda insurance and reinsurance companies face a "difficult" operating environment. A staple for many Bermuda firms is U.S. property catastrophe reinsurance, where competition from capital markets capacity is keeping rates down, and where there has been a heavy claims burden over the past two years.
"The returns are not really where they had been in the past and it just makes it more difficult for the smaller ones in particular to continue going on as is," Schneider said.
Nor is pricing pressure likely to alleviate soon, with rates having largely failed to rise after a disaster-strewn 2017. Sid Ghosh, senior insurance analyst at Moody's, said the effect of the 2018 catastrophes on 2019 rates is "not expected to be significant given that the insured catastrophe losses in 2018 are shaping to be more in line with a long-term average for the industry."
Irrespective of pricing, "we expect consolidation to continue in the reinsurance sector, primarily involving small to medium-sized and less-diversified reinsurers," he added.
Coupled with pricing and claims challenges, size and diversity are proving an advantage in the global reinsurance market, putting pressure on smaller firms. Buyers of coverage are looking to forge fewer, more meaningful relationships with reinsurers, and those that can serve as a "one-stop shop" are in favor.
RenaissanceRe's pending purchase of Tokio Millennium Re was seen by many as a move to maintain its independence after one of its investors, TimesSquare Capital Management LLC, put pressure on the reinsurer to seek a buyer of its own. RenRe CEO Kevin O'Donnell, though, insisted on an Oct. 31 analyst call that TimesSquare's push had "no influence" on the deal.
"I would expect even the large companies, like we saw with XL, may be looking to do potential deals, but then also some of the more mid-to-small-tier type companies may be considering things," Schneider said. He cited AXIS Capital Holdings Ltd., even though it bulked up by buying Lloyd's insurer Novae Group Ltd. in 2017.
"They are a company that could potentially see themselves wanting to pair up with maybe another midsize company, or maybe a larger company would be interested in purchasing something like that," Schneider said. He also noted that although Everest Re Group Ltd. has so far maintained its independence, "[you] never know what you'll see in this space."
US tax changes
Another potential influence on future deals is the sweeping tax reform signed into law in December 2017 by U.S. President Donald Trump. The measure cut U.S. corporation tax to 21% from 35% and also introduced the base erosion and anti-abuse tax, or BEAT, which aimed to disincentivize the transfer of profits overseas and which has a notable effect on insurers and reinsurers.
The BEAT doubles to 10% from its current level of 5% starting in 2019, and then increases to 12.5% after Dec. 31, 2025. Ghosh said the higher rates could reduce the future profitability of firms that have to pay it, which is "one more factor that could influence further consolidation of non-U.S.-based specialty (re)insurers, including Bermuda-based reinsurers."
A lower corporate tax rate could also put U.S.-domiciled insurers in a better position to afford acquisitions, Schneider noted.
"That could result in some U.S. companies buying into Bermuda because they have better economics now," he said.
Bermuda insurers and reinsurers also have features that could be attractive to would-be buyers. They are generally seen as strongly capitalized, disciplined underwriters, and Schneider said they could offer a good route into the U.S. catastrophe and liability markets for those that want to establish or boost a presence there.
And if a Bermuda company has capabilities to deal with alternative capital, as several do, so much the better. Although alternative and traditional capital were once seen as bitter rivals, the two are converging, and some companies are realizing they need to be able to access both to serve some clients' needs.
This was the driver behind U.S. insurer Markel Corp.'s acquisition of Bermuda-headquartered insurance-linked securities manager Nephila Holdings, and Schneider said more such deals are likely.