Analysts at Fitch Ratings believe that certain companies in the Bermuda re/insurance market are “ripe for take over” despite muted M&A market conditions.
The rating agency noted that activity in the Bermuda M&A market has been comparatively low in recent months due to the improved pricing environment, which is placing more focus on organic growth opportunities.
Adding to this is the uncertainty and volatile equity markets resulting from the COVID-19 pandemic, which has paused potential tie ups.
However, to the extent that the hardening market does not serve as a sufficient offset to the added strain of coronavirus losses, Fitch believes that some companies still representing attractive M&A targets.
Hedge fund reinsurers witnessed recent M&A activity as these companies have been challenged to produce profitable underwriting results and higher risk-adjusted investment returns.
For example, Third Point Reinsurance Ltd. and Sirius International Insurance Group, Ltd. are on target to combine operations in during the first quarter to form SiriusPoint Ltd.
Third Point Re is expected to benefit from the added scale of the combined business, and the deal will also resolve Sirius’s shareholder concentration issue, reducing China Minsheng Investment Group’s ownership from 96% to 36%.
Watford Holdings Ltd., another total return reinsurer, is also set to be acquired by Arch Capital Group Ltd., which prevailed over a counter offer by Enstar.
Following this transaction, Arch Capital will own approximately 40% of Watford, and funds managed by Warburg Pincus LLC and Kelso & Company will each own approximately 30%.
“Since its 2014 formation, Watford failed to gain sufficient traction with its hedge fund-managed, higher risk, non-investment-grade fixed- income strategy designed to provide an underwriting pricing advantage,” Fitch explained. “Furthermore, the company’s share price languished after becoming a publicly listed company in March 2019.”
Other prominent deals include the sale of Ariel Re by Argo Group to private equity firms Pelican Ventures and JC Flowers. The company is also exiting European underwriting operations outside of Lloyd’s.
One of the most notable Bermuda M&A events in 2020 was the deal that did not happen, after the pandemic disrupted Covea’s planned $9 billion acquisition of PartnerRe from EXOR.
However, Fitch notes that the parties were able to salvage an arrangement, with Covea putting $0.9 billion into special-purpose reinsurance vehicles managed by PartnerRe, as part of a $1.8 billion investment with EXOR. This sidecar structure provides Covea a diversifying opportunity to invest in the reinsurance market.
