Reinsurance M&A activity should continue well into 2016 as competitive pressures continue unabated, Standard & Poor’s asserted in a new industry report. The ratings entity said that the Berkshire Hathaways of the world – investment holding companies seeking to enter the insurance space – will likely drive many of the future deals.
“Globally reinsurers have seen the future, and it requires greater scale and diversification for them to remain relevant,” Standard & Poor’s said in the report. S&P said that the trend will continue “as the remaining small and midsize reinsurers race to find consolidation partners.”
But who will be the buyers? Standard & Poors said that investment holding companies seeking to tap into reinsurer revenue potential are driving this. The acquirers, S&P said, are not unlike the Berkshire Hathaway business model, where an investment holding company has snatched up firms both in and outside the insurance industry.
“We have seen an increased interest by investors to emulate the Berkshire Hathaway Inc. business model,” S&P said in its report. “Through their investment holding companies, they are acquiring [insurer/reinsurers] with strong operating cash flows that will be upstreamed to the parent company. This buy now and pay later [insurance/reinsurance] model generates cash flows, or “float” that these [Berkshire Hathaway] copycats invest.”
In other words, buying reinsurers the Berkshire Hathaway way gives these investment holding companies access to capital with minimal cost, Standard & Poor’s said.
There are risks in following this model, however, but Standard & Poor’s expects the trend to continue, following such actions as Fairfax Financial Holdings’ $1.9 purchase of Brit plc that closed in July, Fosun International’s $.1.9 billion acquisition of the remaining interest in Ironshore that it doesn’t already own, and EXOR’s upstart move to acquire PartnerRe for $6.9 billion.The Berkshire Hathaway “business model is hard to duplicate and it is becoming a crowded trade in an already saturated reinsurance market,” Standard & Poor’s said. “We expect more similar deals to come to the market during the next 12 months, which will likely continue to put pressure on reinsurance pricing given these holding companies’ lower cost of capital relative to stand-alone, publicly traded reinsurers.”
Investment firms may not be the only ones eying insurance industry acquisitions.
Robert Hauff, managing director of Wells Fargo Securities LLC, pointed out earlier this summer that he sees growing interest in insurance company acquisition targets from nonfinancial firms. Speaking during the S&P annual conference in June, he said he sees an increase in “non-financial-type” firms or “industrial ” firms seeking to buy into the insurance sector.
Source: Standard & Poor’s