Tag Archives: European reinsurers

Hot Take-outs

In many episodes of fervent investment activity within a particular hot spot, like the current insurance M&A party, there is a point where you think “really?”. The deal by Mitsui Sumitomo to take over Amlin at 2.4 times tangible book is one such moment. A takeover of Amlin was predicted by analysts, as per this post, so that’s no surprise but the price is.

With the usual caveat on the need to be careful when comparing multiples for US, Bermuda, London and European insurers given the different accounting standards, the graph below from a December post, shows the historical tangible book value levels and the improving multiples being applied by the market to London firms such as Amlin.

click to enlargeHistorical Tangible Book Multiples for Reinsurers & Specialty Insurers

Comparable multiples from recent deals, as per the graph below, show the high multiple of the Mitsui/Amlin deal. Amlin has a 10 year average ROE around 20% but a more realistic measure is the recent 5 year average of 11%. In today’s market, the short to medium term ROE expectation is likely to be in the high single digits. Even at 10%, the 2.4 multiple looks aggressive.

click to enlargeM&A Tangible Book Multiples September 2015

There is little doubt that the insurance M&A party will continue and that the multiples may be racy. In the London market, the remaining independent players are getting valued as such, as per the graph below tracking valuations at points in time.

click to enlargeLondon Specialty Insurers Tangible Book Values

When the hangover comes, a 2.4 multiple will look even sillier than its does now at this point in the pricing cycle. In the meantime, its party like 1999 time!

Insurers keep on swinging

In a previous post, I compared the M&A action in the reinsurance and specialty insurance space to a rush for the bowl of keys in a swingers party. Well, the ACE/Chubb deal has brought the party to a new level where anything seems possible. The only rule now seems to be a size restriction to avoid a G-SIFI label (although MetLife and certain US stakeholders are fighting to water down those proposals for insurers).

I expanded the number of insurers in my pool for an update of the tangible book multiples (see previous post from December) as per the graphic below. As always, these figures come with a health warning in that care needs to be taken when comparing US, European and UK firms due to the differing accounting treatment (for example I have kept the present value of future profits as a tangible item). I estimated the 2015 ROE based upon Q1 results and my view of the current market for the 2011 to 2015 average.

click to enlargeReinsurers & Specialty Insurers NTA Multiples July 2015

I am not knowledgeable enough to speculate on who may be the most likely next couplings (for what its worth, regular readers will know I think Lancashire will be a target at some stage). This article outlines who Eamonn Flanagan at Shore Capital thinks is next, with Amlin being his top pick. What is clear is that the valuation of many players is primarily based upon their M&A potential rather than the underlying operating results given pricing in the market. Reinsurance pricing seems to have stabilised although I suspect policy terms & conditions remains an area of concern. On the commercial insurance side, reports from market participants like Lockton (see here) and Towers Watson (see graph below) show an ever competitive market.

click to enlargeCommercial Lines Insurance Pricing Survey Towers Watson Q1 2015

Experience has thought me that pricing is the key to future results for insurers and, although the market is much more disciplined than the late 1990s, I think many will be lucky to produce double-digit ROEs in the near term on an accident year basis (beware those dipping too much into the reserve pot!).

I am also nervous about the amount of unrealised gains which are inflating book values that may reverse when interest rates rise. For example, unrealised gains make up 8%, 13% and 18% of the Hartford, Zurich, and Swiss Re’s book value respectively as at Q1. So investing primarily to pick up an M&A premium seems like a mugs game to me in the current market.

M&A obviously brings considerable execution risk which may result in one plus one not equalling two. Accepting that the financial crisis hit the big guys like AIG and Hartford pretty hard, the graph below suggests that being too big may not be beautiful where average ROE (and by extension, market valuation) is the metric for beauty.

click to enlargeIs big beautiful in insurance

In fact, the graph above suggests that the $15-$25 billion range in terms of premiums may be the sweet spot for ROE. Staying as a specialist in the $2-7 billion premium range may have worked in the past but, I suspect, will be harder to replicate in the future.

Updated Insurance Multiples

It has been a while since I looked at net tangible asset multiples for reinsurers and selected specialty insurers (the last such post is here). Motivated by the collapse in Lancashire’s multiple (briefly mentioned in a previous post) since they went ex-dividend, I redid the tangible book multiple figures. Previously I have used average operating ROEs as the x-axis but this time I have used annualized total returns since year-end 2010 (to capture the 2011 catastrophe year with the recent results of the past 3 years). Annualized total returns are made up of tangible book growth and dividends paid in 2011 to today. The split between tangible book growth and dividends, on an annualized basis across the past 4 years, for each firm as per the graph below (when calculating tangible book values, as is my usual practise disclosed previously, I excluded all goodwill and intangibles, except for the present value of future profits (PVFP) for life reinsurance business for European reinsurers).

click to enlargeReinsurers & Specialty Insurer Total Return December 2014

The graph of tangible book multiples to annualized returns is below. [Note – although insurance accounting has converged somewhat in recent years, caution still needs to be taken when comparing UK, European, and Bermudian/US firms due to the differing accounting regimes under which results are reported].

click to enlargeReinsurers & Specialty Insurers NTA Multiples December 2014

I split the firms into different colours – green is for the Bermudian & US firms, red is for London market firms, and blue is for the European composite reinsurers. In terms of who else may get involved in M&A following the Renaissance/Platinum deal, its interesting to see most of the Bermudians bunched up so close to each other in valuation and return profiles. The higher valued and larger firms may be the instigators in taking over smaller competitors but it looks more likely that medium sized firms need to get with today’s realities and seek tie-ups together. Who will wait it out in the hope of some market changing event or who will get it together in 2015 will be fascinating to watch!!

Follow-on: To get an idea of historical changes in the tangible book multiples in the three groupings above, the graph below shows the trends. The multiples in each year are simple averages across the firms (and not all are at the same point in the year) but the graph nonetheless gives an idea of changing market sentiment. Although the London and European firms are a smaller sample than the Bermudian/US firms, the graph indicates that the market is confident that the underwriting indiscipline of years past have been overcome in the London market, thus justifying a premium multiple. Time will tell on that score…..

click to enlargeHistorical Tangible Book Multiples for Reinsurers & Specialty Insurers

Updated TBV multiples of specialty insurers & reinsurers

As it has been almost 6 months until my last post on the tangible book value multiples for selected reinsurers and specialty insurers I thought it was an opportune time to post an update, as per graph the below.

click to enlarge

TBV Multiples Specialty Insurers & Reinsurers September 2013I tend to focus on tangible book value as I believe it is the most appropriate metric for equity investors. Many insurers have sub-debt or hybrid instruments that is treated as equity for solvency purposes. Although these additional buffers are a comfort to regulators, they do little for equity investors in distress.

In general, I discount intangible items as I believe they are the first thing that gets written off when a business gets into trouble. The only intangible item that I included in the calculations above is the present value of future profits (PVFP) for acquired life blocks of business. Although this item is highly interest rate sensitive and may be subject to write downs if the underlying life business deteriorates, I think they do have some value. Whether its 100% of the item is something to consider. Under Solvency II, PVFP will be treated as capital (although the tiering of the item has been the subject of debate). Some firms, particularly the European composite reinsurers, have a material amount (e.g. for Swiss Re PVFP makes up 12% of shareholders equity).

Market valuations of wholesale insurers and reinsurers shift upwards

With many of the Bermudian, European and US wholesale insurers hitting 52 week highs last week, there is a definite shift in sentiment about the sector. It remains to be seen whether the shift is simply part of the overall market rally or a more structural shift in the markets view of the previously historic low tangible book multiples. A wide sample of firms in the reinsurance and wholesale insurance sectors are included in the graph below.

Wholesale Insurer & Reinsurer Valuations