The announcement of the pending merger of Canadian property & casualty insurance and reinsurance group Fairfax Financial Holdings Limited and specialty insurance, reinsurance and investments player Allied World Assurance Company Holdings, AG, suggests that more consolidation is on the cards, according to analysts.
“We think this announcement both confirms and reinforces our expectation of further consolidation within reinsurance and specialty commercial insurance as companies look to combat sustained P&C rate pressure through broadening product offerings and lower expenses (including lower capital costs),” analysts at Keefe, Bruyette & Woods wrote in reaction to the announcement of the merger agreement.
The merger will be undertaken using a cash and share offer with an additional dividend, valuing Allied World shares at $54.00, to be reached with $10.00 in cash and $44.00 in Fairfax shares. That’s an 18% premium to the latest close of Allied World’s shares, and there is also an option for Fairfax to bump the cash component of the offer up significantly should any competing bids come in.
The reinsurance market has not got any easier for small to mid-sized players and KBW’s analysts believe that the majority of management teams will be looking around the market for potential M&A deals.
“Smaller reinsurers already face headwinds in terms of scale and cedents’ reinsurance panel consolidation, and we suspect that most management teams are considering their options,” the analysts wrote.
The analysts also note that the price to boo multiple for the deal is 134% for Allied World, which is exactly the same as seen for Endurance in its acquisition by Sompo.
KBW’s analysts believe that; “Given the likely sustained challenging environment, this multiple strikes us as a near-term ceiling for most deals.”
The combined re/insurer will become the fifth largest U.S. excess & surplus lines underwriter, and total gross written premiums for the pairing will come in at somewhere above $12.5 billion.
