DEALTALK-Reinsurance deal may not spark consolidation

Mon Jun 13, 2011 4:10pm EDT

* Allied/Transatlantic deal not a sector trigger

* Sector is just at the moment of cycle turn

* Low valuations remain an obstacle (For more Reuters DEALTALK stories, click on [DEALTALK/])

By Ben Berkowitz

NEW YORK, June 14 (Reuters) - Allied World's (AWH.N) $3.2 billion takeover of Transatlantic TRH.N may spark a bidding war for Transatlantic but is unlikely to trigger the wave of consolidation long expected for the reinsurance industry.

The obstacle, most people say, is the same one that has plagued the sector for months: depressed valuations that make an acquisition less attractive for both sides.

"The valuations today are not at a good (level) and weren't particularly strong in this transaction either," said Brian Schneider, an analyst at Fitch Ratings.

Reinsurers -- which essentially provide insurance to insurance companies -- have had a good run the last few years. Relatively limited disaster losses have let them build up huge cushions of excess capital.

But at the same time, strong competition has made it hard for them to boost premiums, which has weighed on valuations. At one point this year even the biggest and best reinsurance companies were trading at less than 80 percent of book value, or their net asset values.

"Consolidation has moved at a moderate pace, not as fast as one might have thought, mostly because of valuation," said Laline Carvalho, director of the financial services division at Standard & Poor's.

Most industry experts agree the insurance cycle is starting to turn, driven by record-setting earthquakes in the Asia/Pacific region and a historical series of tornadoes in the United States. These disasters have spurred insurance companies to offload more of their risk.

Even a moderate U.S. hurricane landfall this summer is expected to fully turn the industry back to a period of rising prices. Some analysts have suggested that if markets improve for reinsurers, valuations could rise overnight.

GIVING A LOOK

In the meantime, the combination of excess capital and cheap stock left most observers pushing for the sector to consolidate. At a minimum, experts say, this new deal will get people thinking.

"It's likely to at least give some pause to the management teams of some of the smaller players as to whether this is the way of the future," Carvalho said.

But even at the smaller end of the business, some question whether growth for its own sake actually brings any advantages, especially if companies with diverse lines of business have to try to efficiently combine them.

"Niche players can be very profitable if they stick to their knitting. Niche players don't necessarily need size," said Greg Reisner, senior financial analyst in the reinsurance ratings group at A.M. Best.

To the extent there is any consolidation at the smaller end, it may come in Bermuda, where there are at least 18 publicly traded reinsurers.

Just four of them control half the market. The rest are left fighting for dwindling pieces of the pie.

"That's something we've thought about that might be interesting for the Bermuda market players," Fitch's Schneider said of acquisitions for the sake of scaling up.

BIDDING WAR

Barclays Capital analyst Jay Gelb also said smaller Bermudan players in particular were now more likely to be thinking about selling themselves after the Transatlantic deal.

But he also said the bidding might not be over for Transatlantic.

"(Allied) is merging with (Transatlantic) at a valuation of 0.79x book value for TRH, which could result in other P&C insurers and reinsurers competing for TRH, in our view," Gelb said in a note.

Transatlantic shares rose more than 10 percent Monday but were still more than $2.50 a share below the implied offer price from Allied.

KBW, in a sector report late last year, identified 10 companies that could be on the hunt, including names like ACE Ltd (ACE.N) and Validus Holdings (VR.N). (Reporting by Ben Berkowitz; Editing by Gary Hill)