As I was putting the finishing touches on a feature about merger-and-acquisition activity in the property and casualty insurance industry last week, a Bloomberg news item caught my eye.
"Transatlantic May Draw Rival Bid to $3.2 Billion Merger Deal," the headline read, suggesting that alternative suitors for Transatlantic Holdings, Inc.—the reinsurer that agreed to merge with specialty insurer Allied World Assurance Company Holdings AG last Sunday— would put the kibosh on the deal.
Honestly, when I first heard the deal announcement, I was surprised by the proposed pairing. Actually, it was more angst than surprise. Executives of the merger partners were touting the deal as a "specialty lines merger"—the subject of my report in this week's print issue. Yet despite the specialty bent of both firms, the deal was not in keeping with the overriding trend I had reported in my feature.
Experts I had spoken to in the days before the TransAllied announcement had said that insurer and brokers were seeking small, niche-oriented carriers and underwriting agencies to add new flavors to existing specialty books. "Consolidation"—putting two large organizations together to gain scale—was a trend of a bygone era, they said.
Still, a large capital base makes sense for reinsurers moving opportunistically into a hardening property-catastrophe market—one of the advantages of the deal according to Transatlantic and Allied World executives.
And the more I listened to executives describe the complementary books of the two companies—one a specialist in reinsurance for management and professional lines and the other on the primary side, targeting different classes of these broader specialties—the more the deal made sense.
But just for fun, the Bloomberg article started me wondering about those other potential buyers of Transatlantic. Taking a break from my real work of reporting the facts, here are some hunches—guesses based on nothing but idle speculation.
• First on my list is Validus, no stranger to hostile deals having ruined the party for Max Re when it wanted to merge with IPC Re two years ago. And then there was that odd comment from CEO Edward Noonan about wanting to move into the U.S. Casualty space at some point that NU reported exclusively in a March 2010 article.
Su's Verdict: Too soon for Validus to start making that move, especially with the market improving in its sweet spot of short-tail reinsurance lines like prop-cat. Next…
• What about Alterra? That's the company that was Max before merging with Harbor Point Re in a deal with a lot of similarities to the TransAllied deal.
Su's Verdict: Too similar to the deal with Harbor Point, which means no compelling reason to target Transatlantic. Next…
• Flagstone Re had its bid in for IPC right behind Validus, and Flagstone wants a bigger capital base for sure.
Su's Verdict: Nothing I have ever reported on about this company suggests it wants to do anything other than stick to its core focus of short-tail reinsurance.
• Everest Re. CEO Joe Taranto has roots in American International Group, which once had a big stake in Transatlantic (that is before AIG sold out for over $1 billion to help repay the government). He probably knows the company as well as Scott Carmilani, another AIG alumus and CEO of Allied World.
Su's Verdict: Taranto has been talking about problems of the down market in casualty reinsurance for a while. Last time I listened to a conference call, admittedly a while ago, he was talking short-tail lines and hyping a foray into specialty insurance areas like D&O and E&O potentially making Everest a better suitor for Allied than Transaltantic if it had the means to do a deal. So for Transatlantic—probably not.
All the prior guesses considered only appetites and potential business synergies not capital bases. Who's got the capital?
• ACE has plenty of capital waiting to be deployed. Analysts are always bugging them about when and where they'll use it.
Su's Verdict: There may be too much business overlap. Same probably holds for AXIS, Arch, Endurance—all with some hefty casualty/specialty appetites. Next.
Running out of names…who else is there?
• Chartis (formerly AIG). Specialty lines insurance—a great complement to a specialty reinsurer. Seems like a perfect fit.
Su's Verdict: Been there, done that. Clearly ain't gonna happen.
Anyone else want to play?
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