Stocks of reinsurers such as Endurance Specialty, Platinum Underwriters and Montpelier trade at a price-to-book of less than 1. Such valuations are attractive to buyers but could result in lengthy battles over pricing of the deal as sellers will be reluctant if the offer price is too low.
Another challenge, according to Carvalho, is that businesses need to find a good match. Transatlantic and Allied were complementary businesses, with the former dealing chiefly in reinsurance and the latter in insurance. But other global reinsurers are more diversified and involved in all types of businesses, which could pose integration risks.
And while smaller companies might be inclined to consider mergers to grow bigger, size is not always an advantage, Carvalho adds. Smaller reinsurers can be more nimble and insurance companies continue to do business with smaller reinsurers because they wish to avoid counter-party concentration risk that could arise in working with only one or two big players.
Management's outlook for the market could also be a driver for deals, according to Moody' Lee. "In the past, deals have been more "soft market" transactions where the acquiring company has simply returned excess capital to shareholders.The Allied-Transatlantic deal is more of a "hard-market" transaction, where they are building a balance sheet to capture benefits of a potential hardening of prices in the reinsurance market," said Lee.
Analysts at A.M. Best said that while a soft pricing market tends to stimulate merger activity, deals with somewhat ideal conditions like the Transatlantic-Allied merger are hard to come by. "You have to find organizations that have complementary businesses, no overlap, clean succession plan in terms of senior management and similar cultures. Both these companies were born out of AIG and their cultures are similar. The managements have a long-standing relationship. Senior managements have to come together."
Shares of Transatlantic were climbing 10% to $48.50 Monday . Shares of Allied World were slipping 4% at $55.74.
--Written by Shanthi Bharatwaj in New York
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