LONDON Corporate predators could find the beleaguered reinsurance sector offers attractive opportunities, provided they have the nerve to look beyond a round of bumper claims triggered by the Japanese earthquake.
Analysts and bankers say M&A across the sector has been put on hold while buyers try to assess how much the quake will cost, with one initial estimate of overall industry losses ranging from $12 billion to $25 billion.
But deal activity is expected to pick up strongly once the quake's impact becomes clearer, encouraged by depressed company valuations and the hope that big payouts could trigger a rise in reinsurance prices, reversing years of declines.
"The market was turning anyway, and the earthquake will shift it, which will obviously be a good entry point for private equity and for M&A activity on a wider basis," said Barrie Cornes, insurance analyst at Panmure Gordon.
Major natural disasters can push up reinsurance prices as a welter of claims eats into the industry's capital, forcing less well-funded players to retrench and freeing those still in the market to charge more.
Persistently weak prices, blamed on intense competition between financially strong reinsurers, have capped the sector's shares at historically low multiples of book value over the last three years, analysts say.
Firm evidence of a broad upturn in prices would bolster reinsurance stocks, giving acquirers an incentive to do early deals.
"It's a better time to be buying, as you've got a catalyst for rates hardening," said Investec analyst Kevin Ryan.
Britain's FTSE non-life insurance index, seen as a proxy for the wider reinsurance sector, is down 1.5 percent compared with March 10, the day before the Japanese quake, having recouped most of a 5.5 percent drop between March 11 and March 16.
READY TO MERGE?
Analysts say reinsurance M&A is likeliest in the Lloyd's of London market, where smaller specialist companies were already seen as ripe for consolidation after years of share price weakness.
Key Lloyd's player Brit Insurance BRE.L accepted an 880 million pound offer from buyout firms CVC and Apollo in October.
Since then, Omega Underwriting OIH.L has received approaches including one from privately-held rival Canopius, while Chaucer Holdings CHU.L last month disclosed talks with suitors including private equity tycoon Guy Hands.
The final outcome of these discussions will depend on the exposures to Japan of the companies involved, with most insurers expected to issue individual loss estimates within the next month.
"Generally, these companies are good at diversifying risk, but if a company takes a big hit on natural disaster or nuclear exposure, then M&A will be off the agenda," one banker who advises insurers said.
Chaucer declined to comment, while Canopius and Omega could not be reached.
The Japanese quake could also trigger opportunistic bids for players left financially weakened by an unexpectedly large claim, echoing Catlin's CGL.L 600 million pound takeover of rival Wellington Underwriting after Hurricane Katrina in 2005.
"What you could find is that there are one or two companies that have got it wrong and have too much exposure relative to capital," said Bill Cooper, a banker who advises insurers for Lloyds Banking Group's corporate markets division.
"It could leave a few companies a bit more vulnerable, and investors will spot that fairly quickly."
Bankers caution however that M&A activity across the sector will likely remain muted if the Japanese quake fails to deliver a demonstrable increase in reinsurance prices.
With the Japanese government and local insurers expected to shoulder a high proportion of the quake's cost, some analysts doubt whether the impact on global reinsurers will be big enough to drive a broad and lasting price rise.
Analysts and industry executives also point out that reinsurers have a poor track record in M&A, with many deals foundering due to an inability to agree on price, and acquirers often opting to poach teams of underwriters rather than buy their rivals whole.
(Editing by David Cowell)