Activists Kick Up a New Storm for Reinsurers

On top of tropical storms and disruptive new sources of capital, reinsurers face a fresh threat: activist investors.

Source: WSJ - Paul J Davies | Published on October 3, 2018

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RenaissanceRe, a specialist Bermuda-based, New York-listed reinsurer, is being urged to sell itself by TimesSquare Capital Management, a longstanding shareholder that has decided to go activist. French reinsurer Scor is also facing demands from practiced activist CIAM to reform its governance structure and reconsider a takeover offer from French mutual insurer Covéa, which it rejected last month.

The common theme is that industry returns are depressed and look likely to remain so. However, these targets may not be the right ones for activists.

Returns on equity for reinsurers have long been under pressure, hurt by both weak investment returns in an ultra-low-yield environment and the growth of alternative source of capital such as catastrophe bonds, which has kept reinsurance rates cheap.

This is driving a quest for scale and new fee-income revenue among reinsurance and insurance groups. The result: Deals such as AIG’s $5.6 billion takeover of Validus, another Bermudian, and Markel Corp.’s takeover of catastrophe-bond specialist Nephila.

In this context, though, the situations at RenaissanceRe and Scor seem slightly odd.

RenRe, as it is known, is one of the better-performing Bermudian reinsurers. It has a good mix of traditional reinsurance business and an alternative capital management with more than $2 billion of third-party funds under management.

It therefore has a history of trading at a premium to peers: Its valuation has tracked between 1.2 and 1.25 times forecast book value over the past two years, according to FactSet. XL and Validus were both cheaper before they received takeover offers, so there was arguably more value to crystallize in a sale. In the past, acquirers have focused more on the companies that trail peers in terms of valuation.

Meanwhile, the Covéa bid for Scor doesn’t seem like a great idea at all. The former, a mutually owned home and motor insurer, seems unlikely to find any benefits from combining with a global reinsurer. A much better idea, suggested by analysts at Berenberg, would be a combination of Scor with PartnerRe, a reinsurer currently owned by Italy’s Exor, the investment company that controls Fiat Chrysler. Still, CIAM’s campaign for governance reform and more influence for shareholders may be necessary for any ideas to gain traction.

Whether or not activists are exactly right about these two companies, you can bet that there will be more reinsurance deals to come.