By DAN REYNOLDS, senior editor of Risk & Insurance®, with reporting by GRAHAM BUCK, a London-based writer covering European risk management issues
In this month's Monte Carlo reinsurance meetings, Marsh & McLennan Cos. CEO Brian Duperreault held his finger into the wind and predicted that there will be a slew of reinsurance mergers and acquisitions in the next two years or so.
His reasoning in part stems from what has happened in the world's stock markets in the last six months.
"With markets opening up compared with a year ago, narrowing credit spreads and increasing equity values will have a positive effect on the cost of capital and the ability to obtain it," is what Duperreault told a PricewaterhouseCoopers breakfast gathering in Monte Carlo at the Rendez-Vous de Septembre.
And certainly, if you take the last six months by themselves, there is plenty to what Duperreault said. From its 2009 bottom of 6547.05 on March 9, the Dow Jones Industrial Average has now climbed more than 47 percent, having closed out the day on Sept. 14 at 9,626.80. As drastic as the market's fall was, that represents some substantial healing.
FAIRFAX AND ODYSSEY
Duperreault's remarks in Europe were predated by a Sept. 4 announcement that Toronto-based Fairfax Financial Holdings Ltd. was bidding to acquire all of the outstanding shares of common stock of Odyssey Re Holdings for $60 per share.
Fairfax, which already held 72.6 percent of the outstanding shares of common stock of Stamford, Conn.-based Odyssey, then set about seeing if it could raise the $1 billion to complete the purchase. It didn't take the financial services holding company long to find the money.
On Sept. 8, the company announced that it had sold all 2.8 million-plus voting shares that it offered in connection with the sale. Together with 600,000 subordinate voting shares in the underwritten portion of the offering, Fairfax had the $1 billion it said it needed.
Odyssey's stock rocketed in a matter of days, from $50 per share to more than $62 per share, while over the same period attorneys in Pennsylvania and New York began investigations into whether Fairfax was using its existing leverage to buy the remainder of the company at a cut rate.
But the ease of capital-raising on the part of Fairfax could be part of an improving trend.
According to our Bermuda-based correspondent Roger Crombie, that island's reinsurance sector has been suffering from capital stricture to the degree that the purchase of IPC by Validus, announced in early July, amounted to a "takeunder," a purchase under the company's book value price. But with the way the markets are going, future sellers might have better luck.
The fourth quarter is scheduled to mark the closure of the acquisition of Zug, Switzerland-based Paris Re by the Bermuda-based PartnerRe in a much larger transaction.
What remains to be seen is how much more of an M&A wave is out there, but Duperreault, for one, believes it's coming.
"The combination of capital availability and growth opportunities will drive a wave of M&A activity and will probably drive a considerable amount of consolidation over the next few years. Some carriers realize they will have to acquire or be acquired," he said.
Duperreault wasn't the only one forecasting more M&A activity in the days leading up to and including the Rendez-Vous. In remarks made in London, Tony Ursano, chief executive officer of Willis Capital Markets & Advisory, a unit of Willis Group Holdings, said the continued soft insurance market will motivate more M&A as firms try to achieve growth, diversification and specialization through that tool.
"As markets stabilize, valuations boost confidence and acquisition financing capacity and terms improve, we expect to see a significant increase in M&A activity in the insurance space," Ursano told an industry gathering on Sept. 3.
And Ursano added that that hard market that the industry keeps its eye on isn't that far away.
"We are one event away from a hard market," Ursano said. He said investment losses and lowered investment returns have many insurers trading at below book value.
"Under these circumstances, a significant investment or catastrophic loss would catapult the industry into a hard market," Ursano said.
September 14, 2009
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