Insight and Intelligence on the London & International Insurance Markets 24 Apr 2018
Bankers scour market for buyers as M&A fever eases
- 17 April 2018
Appetite for acquisitions at the rich multiples targeted by sellers is more limited than the feverish speculation of recent weeks may have suggested, according to an initial canvass of bankers working in the sector.
M&A has been the sector's preoccupation this year after Brian Duperreault's AIG struck a deal to buy Validus for $5.6bn, or 1.6x book, while Axa prevailed against Allianz to acquire XL for $15.3bn, or 1.5x book.
And these stories were followed by a succession of businesses being either put up for sale or opened up to bids.
First Aspen drafted in JP Morgan to work alongside Goldman Sachs on a sale process .
Then this publication revealed that The Hanover had retained Goldman Sachs to hold an auction for its Lloyd's business Chaucer.
It then reported that Enstar and Stone Point had decided to listen to offers for live platforms StarStone and Atrium.
Subsequently, The Insurance Insider reported that Sirius was gearing up for an IPO in London while also seeking a minority stake sale, with both moves confirmed by CEO Allan Waters. Banking sources have also suggested that a full sale is a possibility, although Waters was unwilling to comment on this possibility.
Other businesses in Lloyd's, Bermuda and the US market are also the subject of rumours, but even if the analysis is confined to just these assets, there could potentially be $7bn of value in play.
The focus on M&A reflects a number of sector dynamics. The outlook for specialty (re)insurance businesses is highly challenged given years of compound rate reductions, ebbing reserve releases, depressed interest rates and stubbornly high expense ratios.
And despite modest improvements in market conditions following $140bn of catastrophe losses in 2017, the muted uptick in rates seems to have confirmed the thesis that the availability of third-party capital has permanently reset the level of returns available to carriers. These dynamics are pushing boards to seriously consider their independence.
The dearth of available growth has also encouraged demand for acquisitions, with composite carriers like AIG and Axa attracted to specialty and reinsurance franchises for a variety of reasons.
Within the London market, the availability of assets reflects the disposal of non-core businesses (Chaucer) and an opportunistic attempt to take advantage of takeout multiples that have shown a surprising resistance to downward pressure from deteriorating fundamentals (StarStone, Atrium).
However, despite all of this activity there is a growing sentiment within the advisory community that what was thought to be a throng of enthusiastic buyers is in fact a select group of more disciplined ones.
The initial stimulus given to buyers by major acquisitions from AIG and Axa has arguably given way to a dampening effect. At its nadir, Axa's share price was driven 16 percent lower as investors voted with their feet on both the price paid for XL and the insurer's strategic pivot towards P&C.
Allianz, Zurich and Generali - all flagged by sources as potential acquirers in the same vein - are likely to operate with more caution owing to the Axa effect, with a stampede into specialty at frothy multiples looking like a foolish move at this point.
Arguably a similar dynamic is in place with the Japanese big three after MS&AD's experience with Amlin. Japanese investors are likely to be hypersensitive to big M&A plays from any of the country's major insurers at this point, and a London deal in particular would require significant management steel.
Another negative for sellers looking to get deals over the line is the mounting sense that valuations have become untethered from sector fundamentals. AIG was determined to get a statement deal done and paid a 46 percent premium to Validus' share price to secure the asset it wanted.
And with the XL deal the competitive tension created by the presence of Allianz allowed the target to secure a multiple that looks rich for a single-digit return on equity business.
It seems clear now that there is nothing automatic about the availability of these multiples. Both reflected very specific situations, as well as expert sell-side execution from the boards of XL and Validus.
In addition, any buyer of an asset in the specialty and reinsurance markets will have to face up to the reality of a highly challenged sector, with double-digit returns a distant memory for all but the best businesses, and volatility still meaningful as 2017 showed.
The short- and long-term challenges facing the Lloyd's market have been covered at length and do not need to be rehearsed again. However, these issues will surely give any buyer of an asset with significant EC3 exposure pause for thought.
Aspen's board, meanwhile, will not be able to plausibly tell the same stories that Validus and XL were to their suitors.
The sale is perceived as a distressed process, with the business requiring a buyer with specialist turnaround expertise and a willingness to accept a high degree of execution risk.
Talk within the sector has increasingly migrated from a strategic deal - where 1.25x book did not sound like an outlandish valuation - to a financial bidder. Pricing expectations have also come under pressure, with an offer in the mid-$40s per share mooted in some quarters.
Speculation around a strategic bidder continues to focus on The Hartford, with banking sources increasingly playing down interest from Liberty Mutual and Markel, although specific intelligence on the seriousness of the Connecticut-based insurer's interest is still lacking.
The Insurance Insider previously named investment giant Apollo as an interested party, and most bankers expect that it will have to cross swords with peers KKR, Carlyle and Blackstone. CVC would have a social problem if it were to look to acquire the business given that it backed John Charman's hostile bid for Aspen back in 2014.
Non-Japanese Asian bidders like PICC, China Re and Samsung are as ever discussed, but the major banks are sceptical that such parties can prevail in auction processes.
Pension funds like Ontario Teachers' Pension Plan and sovereign wealth funds like the Abu Dhabi Investment Council also feature in discussions. However, getting these entities comfortable enough to make major direct investments is still considered a challenge for sellers.
Each asset only requires one high-multiple bidder for boards to get the valuations they require, but there is a growing sense that the predicted feeding frenzy is not materialising.
Ultimately M&A seems likely owing to the scale of challenges for specialty and reinsurance businesses, as well as the lack of growth across the sector.
But it looks as if the pace of consolidation may be slower and that the deal multiples will be lower than sentiment suggested just a month ago.
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