Institutional investors attraction to insurance and reinsurance clearly remains strong, with another deal announced this morning, which will see large pension fund the Ontario Municipal Employees Retirement System (OMERS) taking a stake in Brit plc.
OMERS is the latest demonstration that insurance and reinsurance as diversifying and return driving investments hold significant attraction for large investment driven organisations, despite the lower rate and yield environment in re/insurance.
Back in January of this year Canadian property & casualty insurer Fairfax Financial announced that it was buying specialty Lloyd’s focused insurance and reinsurance firm Brit plc for $1.88 billion. Now it has announced that it intends to offload up to 29.9% of the re/insurer to OMERS.
In this mornings announcement Fairfax said that it has entered into a non-binding Memorandum of Understanding (MoU) with OMERS which will see the pension fund acquire up to 29.9% of Brit plc at a price of $4.30 per share. The price is equivalent to the valuation that the original acquisition by Fairfax offered, based on an exchange rate as at the 17th February 2015.
OMERS, which has around CAD$72 billion of assets under management, does not currently have any interest in Brit shares.
While some may feel that large investors entering the insurance and reinsurance space at this time, of depressed pricing and high competition, are perhaps foolish, many others are aware that such market conditions provide opportunities to disrupt, demonstrate efficiencies and innovate.
Historically in many other sectors of business and finance, times when a market appears under pressure can be the best for those with more aggressive ambitions to gain market share and to outperform the incumbents, through innovation and adapting business models.
The types of investors behind this deal and the EXOR bid for PartnerRe that was announced yesterday, are shrewd with experience across multiple sectors. They see a good opportunity, which can add diversification to their overall holdings, and can value and execute it rapidly, which may come as a surprise to some.
However the continued attraction to insurance and reinsurance sector returns is clear, and not just from direct access to risk through insurance-linked securities (ILS), but through equity stakes in companies thought to have a chance to outperform, perhaps with new business models, too.
Of course OMERS could just be supporting Fairfax in this acquisition and may intend to offload its stake in the future at a hoped-for profit. Or it may see Brit as a great opportunity to access the returns of the insurance and reinsurance market, with a specialty lines and Lloyd’s of London focus.
The investors seeking to come into insurance and reinsurance through deals such as PartnerRe and this Brit buy will all have a keen sense of cost-of-capital and what it will take to maintain and grow the acquired business, even in the current market environment. They may also hold the expectation that the market might be at or near a bottom in terms of pricing, meaning the only way could be up.
It will be interesting to see if the flurry of interest in the re/insurance sector from large institutional investors stimulates more M&A deal flow and perhaps more interest in ILS as well.