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(Re)Connect 2020 - M&A Roundtable

Click here to download the (Re)Connect M&A Roundtable supplement

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Has there ever been a more interesting time in (re)insurance for mergers, acquisitions and new capital formations?

Towards the end of spring this year, a combination of the widening Covid-19 crisis and a series of other macroeconomic fundamentals put stock markets down by around a third at its worst and, closer to home in terms of specialty (re)insurance, fears that a wave of property BI losses could cause a multi-class earnings hit, which could even turn into the largest insured loss in the sector’s history.

The P&C market turn was already in the works of course, following years of soft pricing, mounting loss cost inflation in long-tail lines and major remediation drives at the likes of AIG, Lloyd’s and others. This, alongside Covid-19, looked set to create a major market dislocation and, with it, opportunity.

Private equity (PE) houses – keen not to miss out on the start of a major investment opportunity – began an intense round of discussions with senior sector figures, trying to work out how long this firming of rates might continue, and what that would mean for their potential returns.

Top brass at carriers and brokers carried out a similar exercise, and began pitching their projects to capital.

And after an initial slowdown – banks were facing a number of headwinds going into the Spring including central-bank intervention, government action on lending etc, higher funding costs, credit downgrades to consider and increased demands on internal capital – the market for deal-making is suddenly very much back.

The Class of 2020 is very different to the Class of 2005 – the last round of event-driven dislocation. This time, PE money is moving towards scale-ups and buy-ins as well as de novo launches. And the legacy market is enjoying yet another “legacy moment”, as savvy carriers seek to make their portfolios more efficient in an effort to redeploy capital in better opportunities.

What better time, therefore, to bring a group of senior global specialty executives together for a frank and candid discussion about what they are seeing at the coal face during this latest wave of new capital.

Among the discussion points, as you’ll see below, are how London fares versus Bermuda in times of market disruption and renewal, whether the broker market can expect further consolidation after Marsh-JLT and Aon-Willis Towers Watson, and how Lloyd’s is positioned in light of its recent remediation exercises – but also having had a significant shakeup in terms of its capital make-up.

Much of the discussion was also around culture, and the imperative to get it right when mergers and acquisitions happen. Hearts and minds have never been more important, and it has never been more evident that, perhaps more than anywhere else in financial services, specialty (re)insurance really does have people at the centre of its success.

The key consideration for would-be investors though is that they must be in it for the long term.

As discussed in candid terms during the roundtable discussion, whether it’s capital backed by PE, total return players or anyone else wanting to play a role, that investor needs to know this is an industry where you need to be in for a long time – not least because many of the risks develop over a long period.

Putting Covid-19 to one side for a moment, the social inflation seen in the US and other areas reminds us that some trends in (re)insurance crystallise over decades. This is not an investment you can rush into, make a quick buck and exit in a short period. And with next to no leverage coming from the asset side of the balance sheet, technical underwriting discipline has never been more important.

In the weeks following this roundtable, headlines had started to emerge questioning how much longer we could expect to see PE and other private investors’ interest in our sector. But for the time being at least, it looks as though those buyers are here and willing to spend. As of September, five major PE houses had put money into Lloyd’s for 2021.

Hampden Agencies declared that interest from private capital in investing at Lloyd’s has tripled in the last six to eight months, much of it from first-time investors. Trade capital too appears to be willing to put its hands a little bit deeper into its pockets. For market executives with a plan to execute capital quickly and efficiently, now is your opportunity to bag that investor.

Charlie Thomas

Content director, Insider Publishing Group

Click here to download the (Re)Connect M&A Roundtable supplement

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