Shareholders from Aspen Insurance Holdings have a July 25 deadline to vote on a number of governance proposals that could boost Endurance Specialty Holdings’ prospects for acquiring the Bermuda reinsurer for $49.50 per share. Whatever the outcome, an industry analyst said that M&A winds within the property/casualty reinsurance sector are only increasing.

Meyer Shields, Keefe Bruyette & Woods
Meyer Shields, Keefe Bruyette & Woods

“We are clearly seeing very rapid rate decreases within property/casualty reinsurance, which was the most profitable [arm of] the insurance industry in the last few years, ” Meyer Shields, managing director for equity research, property/casualty insurance at Keefe, Bruyette & Woods, Inc. told Carrier Management. “This makes it harder for companies to survive on their own. The profitability they expected or produced over the last few years will be harder to produce or maintain going forward.”

Shields said another factor is putting pressure on reinsurers to consolidate: reinsurance buyers now prefer to deal with fewer reinsurers.

“A circle of a select few reinsurers are having an easier time with small rate decreases or market preference with companies to do business with bigger reinsurers as opposed to smaller companies,” Shields said.

Beyond Aspen, Shields said there are between 10 and 12 reinsurers that are potential acquisition or M&A targets because of their relatively small size. He wouldn’t comment on specific companies, but pointed out reinsurers that KBW sees as doing well on their own, including Munich Re, Swiss Re, Hannover Re Group, SCOR, and the larger Bermuda companies such as RenaissanceRe, PartnerRe and Validus Group.

Shields’ comments come after Nomura Equity Research analyst Clifford Gallant released a report in June that said the M&A outlook for Bermuda reinsurers is pretty high due to the soft market. He wrote that Bermuda insurers and reinsurers such as ACE Limited, XL Group and PartnerRe are potential acquirers in this scenario, and that Aspen, Montpelier Re Holdings Ltd., Platinum Underwriters Holdings Ltd. and Argo Group International Holdings, Ltd are “more likely to consider consolidation” under current market conditions.

So where does that leave the likelihood that Endurance will successfully acquire Aspen after months of trying?

Shields placed the chances for a successful M&A in this situation at 50/50.

“If Endurance doesn’t get Aspen [shareholder] support for current changes to the board, then this deal is over,” Shields said. “But if Aspen’s shareholders do support the proposals from Endurance, then the second step would be getting to an agreeable price.”

He said that Aspen shareholders have nothing to lose in at least talking with Endurance, which wants to convene a special meeting of Aspen shareholders to vote on a proposal to boost the board of directors from 12 to 19 members. Endurance also wants support for a “Scheme of Arrangement” that would authorize a court-ordered meeting, during which Aspen shareholders could directly consider Endurance’s acquisition offer.

“Ultimately shareholders want to make money,” Shields said. “And when the first Endurance bid came on [there have been two since April], we saw a significant uptick in Aspen’s share price. There is some understanding that the [latest] bid provides more value to Aspen’s shareholders.”