dividends, engage in share repurchase and seek a higher credit rating.
All of these are shareholder-friendly. The principal obstacle has been
governance, particularly with boards that are closer to management
than they are to shareholders. This is starting to change, and that’s a
good thing.
What do you expect the critical factors to be in any mergers and
acquisitions activity?
John Berger, chief executive officer, Harbor Point
Probably, the most important factor will be the belief by boards
that the combination makes a lot of strategic sense in the medium to
long term. The industry as a whole, for the most part, is not enjoying
attractive multiples to book value. It is hard to see one entity ‘paying
over the top’ for another as we have seen in the past. Thus, senior
management and boards must believe that the combination makes
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great strategic sense and that they will enhance their future value.
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Social issues will become less of an issue as this reality sinks in.
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Don Kramer, chairman and chief executive officer, Ariel Re
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First, the usual factors—strong management, sound finances, a
reasonable return on equity and well-measured levels of assumed risk.
The second consideration is fit. Two companies doing the same thing
will result in a loss of business either because they have too much risk
on one account or because the account doesn’t want so much exposure
to a single counterparty.
The third consideration is capital adequacy. One company has to
have excess, and the other a burning need for it and a sound business
plan for its deployment.
“ further consolidation
And, finally, absolute size has become an important consideration
appears inevitable and
for a publicly traded company. It has to have a large enough capital
position to attract institutional investors and a sufficient float of
a number of leading
publicly traded shares to ensure liquidity.
reinsurers have already
Mark Byrne, chief executive officer, Flagstone Re
declared intentions to
First, a merger has to make sense for the shareholders of both
look seriously at possible
companies. The parties need to understand each other’s balance sheets,
particularly hard-to-value assets, and reserve methodology and quality.
future combinations.”
Ideally, there should be a shared vision as to what the combined
company will be. It is desirable that the businesses be complementary,
without much overlap. Finally, management and cultural compatibility
that existed in the industry last year disappeared with the crisis in the
should be considered.
credit markets. It looks like credit markets are easing. I believe that
access to capital to make acquisitions will certainly be more available
Jamie Veghte, chief executive officer, XL Reinsurance Operations
than it was nine months ago. Having said that, pricing multiples
A critical factor in successful mergers and acquisitions activities is,
relative to book value remain at very low levels. This will impact
typically, accurate valuation of the assets and liabilities on the balance
M&A work due to the relatively low level of currency in acquiring
sheet of the companies that are being looked at. Obviously, with all
companies’ paper.
the turmoil in the credit markets last year, the asset valuation will be a
crucial part of the due diligence process. In addition, I think it will be
Mark Byrne, chief executive officer, Flagstone Re
critical to successfully integrate acquired companies through effective
The principal driver is, and should be, unlocking shareholder value. cost management. In doing so, successful companies should be able to
The excess capital created by a merger can be used to grow, pay special achieve product and/or geographical diversification in the process.
Bermuda Re/insurance . September 2009 19
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