MARKET FORCES DRIVE CONSOLIDATION

Q: Are we likely to see more M&A activity?

“There is already a lot going on, keeping in mind that there’s a finite number of companies left with which to consolidate.”
Gavin Woods

Woods: The expectation is that there will continue to be a lot of M&A activity—there is already a lot going on, keeping in mind that there’s a finite number of companies left with which to consolidate. What’s driving that is opportunity—in part, companies taking advantage of the existing financial conditions.

Kelly: When we’re having conversations with some of the PE houses that are looking to potentially enter the market in 2021, the question they are asking themselves is whether to start up as a brand new shell or look to acquire something, either a piece of an existing organisation, or an actual company itself to get you straight into the market, if you buy the right business.

When we think about what’s likely to drive M&A in the immediate term, it is that ability to quickly access the market that attracts incoming capital to some of these existing companies.

Brown: We’ve seen a number of transactions, some have been fairly large. A number of the others are more niche or strategic acquisitions so we’re going to continue to see that, we’re seeing a good pipeline of deals in our practice currently so that’s encouraging.

It’s going to be interesting to see whether the hardening rate environment slows some of the activity on the property casualty side, that’s what you would probably expect, but it’s also the sector that’s seeing a lot of activity right now.

“The question they are asking themselves is whether to start up as a brand new shell or look to acquire something.”
Sean Kelly
“It’s going to be interesting to see whether the hardening rate environment slows some of the activity on the property casualty side.”
David Brown

Some of these new startups are going to be driving some of the activity in that they quickly want to gain scale and take advantage of the hardening market. We talked a lot about the property casualty side of business, and we’re seeing a significant amount of activity on the life reinsurance area as well, which is exciting for Bermuda.

Perez: I agree in terms of the newcomers needing to buy companies because there’s no way they’re going to be able to take advantage of the general renewals.

The problem again is COVID-19 throwing a bit of a monkey wrench in the valuation side, so that has slowed down activity a bit. From what I see on the market the newbies, in order for them to gain scale are going to have to make some acquisitions.

Adderley: I agree that size is important to the amount of capital the insurance company has on startups, and that startups are buying platforms in other jurisdictions, but I wonder how much M&A activity will actually be in Bermuda.

First off, existing players have been so busy raising capital taking advantage of this new hard market, they might not be necessarily focusing on external growth—they’ll be doing internal growth. We’ve seen that with people specifically coming out saying ‘I’m raising capital to take advantage of this market’.

“The problem again is COVID-19 throwing a bit of a monkey wrench in the valuation side, so that has slowed down activity a bit.”
Andre Perez
“I’d be curious to see if there’s a lull for a year and a half, because new startups will be crazy just trying to get systems in place.”
Brad Adderley

On the new startups that will come, will they be big enough players to lead the market? Probably not. I don’t know what the new startups will be, but I don’t think they’re going to be at the Convex size. But they themselves have been so busy trying to implement the structures and management teams and trying to get on to lines of business, they won’t have enough time or capacity to think about who else they could buy, and they’ll be the smaller players in the marketplace.

They could buy stuff externally, but internally, in Bermuda, I don’t know how much M&A we’ll see. We might see rights agreements instead: people taking over people’s books of business without buying the company, but taking the rights to that book of business. That might occur more.

I’d be curious to see if there’s a lull for a year and a half, because new startups will be crazy just trying to get systems in place, and everyone else will be trying to take advantage of the hard market. Plus, in Bermuda, how many more entities are there that you can buy?

Seth: A few years ago, the motivation for M&A was the lack of organic growth opportunities so companies were buying other companies and it was more an expense or efficiency play because they couldn’t go out and underwrite and meet those profitability targets, so they bought other companies and drove the efficiencies that way.

Now, if you’ve got some spare capital, you can underwrite and generate good organic growth going forward. What is driving the M&A now is more PE firms searching for yield. With interest rates being so low, they’re looking around saying ‘what is the best risk-adjusted return?’.

The acquirers are different, and the motivation is different as well.

“What is driving the M&A now is more PE firms searching for yield.”
Anup Seth

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