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I. Review of M&A Activity in 2015
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4. TheNon-Life/P&CSector
a. Market Trends and Primary Drivers of Activity
M&A activity in the non-life/P&C sector was fairly robust in 2015, and included several significant transactions. The largest transaction was the $28 billion merger involving The Chubb Corporation and Ace Limited, which is the largest P&C transaction in the United States since the financial crisis. Three other significant transactions involved Asian buyers and were discussed above. The largest of these was the $7.5 billion acquisition by Tokio Marine of HCC Insurance Holdings. Unlike in the life and health insurance sector, however, while the M&A transactions involving Asian buyers were all sizeable, they do not represent a large percentage of the M&A activity in the sector.
Except with respect to the acquisitions by Asian firms, the primary driver of this M&A activity appears to be increased competition among industry participants, as well as the continued plethora of alternative capital available for the reinsurance of catastrophe risk. This increase in competition can be traced to a number of factors. P&C insurers have enjoyed several years of benign loss experience and, with a few exceptions, solid financial performance. While these are positive factors for industry participants, they have also attracted new players to the industry and burdened traditional players, particularly reinsurers, with excess capital. The historically soft reinsurance market has increased the availability of attractively priced reinsurance, and that has further increased the availability of deployable capital among direct writers. This generally has led to increased competition among market participants, put downward pressure on pricing and loosened underwriting restrictions. These factors, along with the persistent low-interest-rate environment, which depresses investment yields but makes the borrowing of money to finance acquisitions relatively inexpensive, expense growth and other factors, have created a situation in which market participants are exploring M&A transactions to fuel growth, diversify their operations and position themselves to compete for business from stronger platforms.
b. M&A Activity Involving Reinsurance Companies
In our 2014 Year in Review, we discussed in some detail the shifting dynamics in the market for reinsurance and retrocessional coverage and how such factors have resulted in consolidation in the industry. Total reinsurance capacity has increased substantially over the last decade due to benign loss experience, new entrants into the industry and the emergence of the ILS market, the state of which we describe in greater detail in Section III below. This has led to a string of transactions in the reinsurance industry, particularly among off-shore reinsurers with significant exposure to catastrophe risks.
Several transactions in the industry were announced in 2014 and, at the time we published our 2014 Year in Review in early 2015, the trend was showing no signs of slowing down. XL Group had just announced its agreement to acquire Catlin Group Limited and Axis and PartnerRe had just announced a “merger of equals” whereby they would create a company with a combined market value of approximately $11 billion. While XL and Catlin completed their announced merger during 2015, the Axis/PartnerRe merger was never completed. Instead, after an extended takeover battle that included a number of bids, counter-bids, and amended terms, Exor S.p.A. ultimately was successful in acquiring PartnerRe in an all- cash transaction worth over $6 billion. Axis received a $315 million termination fee from PartnerRe but was left without a merger partner. At the time of this writing, Axis remains an independent company.
Axis is not the only Bermuda reinsurer that was unable to complete a merger with its preferred merger partner in recent years. In our 2014 Year in Review we detailed Endurance’s $3.2 billion hostile bid for Aspen Insurance Holdings Ltd. Aspen ultimately was successful in repelling Endurance’s bid. In 2015, Endurance moved on and acquired Montpelier Re Holdings Ltd. for $1.4 billion.
The recent consolidation of reinsurers to achieve scale, and to diversify into other geographic regions and into direct insurance and new business lines, seems likely to continue in the near term, although probably at a
Developments and Trends in Insurance Transactions and Regulation 2015 Year in Review