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More consolidation among Bermuda insurers likely after XL deal, analysts say

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More consolidation among Bermuda insurers likely after XL deal, analysts say

After two of the largest announced acquisitions of Bermuda-based insurers in recent years, more deals in the space are expected, analysts said.

Following French life insurer AXA's announced $15.26 billion acquisition of XL Group Ltd. and American International Group Inc.'s $5.56 billion deal for Validus Holdings Ltd., other Bermuda insurers may become targets.

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CFRA analyst Cathy Seifert believes smaller Bermuda-based insurers are likely to be consolidated by buyouts from larger insurers.

"My sense is that this consolidation trend will likely continue, and there are a handful of other companies out there in the insurance and reinsurance space likely to be acquired," she said in an interview.

Keefe Bruyette and Woods equity analyst Meyer Shields wrote in a research note that among Bermuda reinsurers his firm covers, RenaissanceRe Holdings Ltd. is an "attractive target."

The company saw a combined ratio of 244.80% and a pretax net catastrophe loss of $931 million for the third quarter of 2017 in the wake of several North American hurricanes. CFO Robert Qutub called the loss the single largest in RenaissanceRe's 24-year history, according to a transcript of the company's third-quarter conference call.

Shields wrote that property catastrophe pricing has become a headwind for RennaissanceRe and could lead to a buyout by a specialty-business acquirer.

Three Bermuda-based P&C insurers over $1 billion in market cap were trading at discounts to tangible book value as of March 2: AXIS Capital Holdings Ltd., Aspen Insurance Holdings Ltd. and Third Point Reinsurance Ltd.

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Seifert also said the trend of consolidating smaller P&C insurers could usher in another era of diversified, multiline insurers. P&C insurance companies have become acquisition targets for life insurers as exposures to long-term care, adverse morbidity trends and reserve charges continue to plague bigger companies.

"You've got the life insurance industry at an inflection point," Seifert said. "There may be a number of companies with a similar business mix and structure to AXA's who may come to the same conclusion that AXA did: — that they've got an outsized exposure to life insurance and asset management risks," she said.

AXA, Seifert said, has taken on similar pressure, and is "heavily exposed" to the life and annuity space, which has been "battered" in the U.S. by interest rates and adverse reserve developments. AXA plans to conduct an IPO of a minority stake in AXA Equitable Holdings Inc., which houses its U.S. life, annuity and asset management operations, in the second quarter. The company said proceeds would be used to expand in P&C, among other areas.

Jefferies equity analyst Mark Cathcart wrote in a March 6 research note that the XL Group transaction, together with AXA executives' expectation that it will spin off AXA Financial, "represents a seismic shift in the group away from life and financial market risk, towards non-life and underwriting risk."

"XL will certainly be marked as a transformational deal for AXA at both the operational and corporate level with investors bound to revisit their investment thesis," Cathcart wrote.