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(Re)insurer valuations leave legacy sector eyeing ‘walking dead’

Run-off buyers are increasingly looking to bid for live market (re)insurers as historic low valuations continue to leave much of the sector trading below the value of their net assets.

With the management of Flagstone Re, one of the most likely candidates for a run-off buyer, having agreed to sell itself to larger rival Validus for $623mn, the sector is now eyeing other potential targets that could be considered more valuable dead than alive.

"There's a couple more that I think won't survive. Whether they get taken out by an Enstar or a Catalina, or whether they get taken out by a live buyer like Validus," a senior figure at a run-off buyer told The Insurance Insider.

The legacy sector's ability to successfully target live (re)insurers was demonstrated last month when Enstar agreed the $252mn purchase of Seattle-based workers' comp insurer SeaBright Insurance Holdings.

Furthermore, senior sources in the legacy sector insist that a run-off player could pay more for Flagstone and still walk away with a comfortable profit, though a bidding war will only materialise if anyone has the stomach for a fight with the pugnacious Validus.

Industry figures advise that a general rule of thumb for when a public (re)insurer would be considered a viable target for a run-off buyer would be when it was trading at around 0.7x book or lower for a sustained period.

This gives scope for a buyer to pay a premium to the current trading price and take the costs of shutting the business down while remaining relatively confident of a margin."

Anything trading below 70 cents in the dollar you have to think may be fair game. Okay, maybe the shareholders don't want to sell, maybe the management will fight a lot and maybe there are other alternatives. But I would suggest anything trading below 0.7x book has something fundamentally wrong with it," said one CEO in the run-off sector.

Another senior executive in the run-off sector warned that price to reported book values are not necessarily an accurate indicator of available value to run-off buyers.

"You can see companies that are trading in that range, but when you actually go through and fair value their balance sheet, 0.7x book suddenly looks much more like 0.9x," he explained.

"Short term swings are one thing, but if a company is trading at this level for a longer period of time that usually means investors sense what the real value of a company is when you go through and start writing off the value of intangible assets and other things."

The executive pointed to the example of Flagstone, where Validus has identified $58.9mn of balance sheet adjustments on top of reassessing the company's reserves. These adjustments relate to severance costs, real estate writedowns and tax charges.

Nevertheless, recent involvement of run-off buyers in processes for live market players seems to support the notion that the "red zone" for live players is around a 30 percent discount to book value.

Enstar's approach for the underperforming SeaBright was agreed at 0.7x book value, with the stock previously trading at a considerable discount to this level.

The Bermuda-based run-off giant also attempted to muscle in on the $3bn Transatlantic Re buy-out talks last year with a proposal to buy the New York reinsurer in partnership with private equity firm Stone Point Capital. Transatlantic was eventually sold to Alleghany at around 0.84x book.

Meanwhile, both Catalina and Enstar were actively pursuing Lloyd's minnow Omega before being thwarted by live buyer Canopius, which triumphed with a £164mn bid that valued the company at around 90 percent of its net assets.

The (re)insurance industry on average is currently trading at record low valuations, as diminished investment income coupled with catastrophe losses and prevailing soft market prices in many business lines saps investor appetite for a sector with underperforming return on equity.

Currently, 20 of The Insurance Insider's core universe of publicly listed (re)insurance stocks trade at below 0.85x book (see graph).

Of those below 0.7x book, Bermudian Argo, trading at 0.52x reported book value, could be considered the most viable target given the scale of primary insurers The Hartford, AIG and The Hanover.

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