13 Specialty Insurers Emerging As Takeover Targets: S&P

October 1, 2015

Standard & Poor’s sees a number of specialty insurers as potential takeover targets by both rival carriers and investors seeking to expand in the segment, thanks to stellar operating performance versus the P/C industry as a whole.

The ratings entity said in a new report that 13 specialty insurers – Allied World Assurance Co. Holdings AG, American Financial Group Inc., Arch Capital Group, Argo Group International Holdings Ltd., AXIS Capital Holdings Ltd., HCC Insurance Holdings Inc., Ironshore Inc., Markel Corp., Navigators Group. Inc., OneBeacon Insurance Group Ltd., RLI Corp., RSUI Group Inc. and W.R. Berkley Corp. – in aggregate have “significantly outperformed the U.S. P/C industry” in terms of underwriting.

Most scored between A- and A+ in terms of financial strength ratings, save for HCC Insurance and its AA rating. Ironshore is not rated. Two – Ironshore and HCC Insurance – agreed to be acquired in just the last six months. AXIS was in a merger deal with PartnerRe before Italian investment firm EXOR swooped in to acquire PartnerRe.

As Standard & Poor’s noted, insurers such as AIG, Nationwide and ACE dominate specialty lines through their affiliates, which are then part of inter-company pooling arrangements with much larger standard lines companies. Because of this, S&P said it is “impossible to assess the stand-alone operating performance of these units” so they’re not included in the roundup.

With growth slowing in the overall industry, specialty carriers and their rapid growth trajectory makes them desirable, S&P said.

“We expect the specialty companies to continue to attract the attention of insurers and investors interested in expanding their footprint in this market segment,” the S&P report said.

A big selling point, according to S&P, is that their strong underwriting profitability has left these carriers with “more favorable assessments of operating performance, a key component of business risk profile under our insurer rating methodology.”

Standard & Poor’s said that specialty insurers are hard to define, but that they have some common traits that make them attractive, such as their ability to quickly enter a line where they see profit potential and then pulling back when that niche market gets too competitive.

“What often distinguishes specialty lines writers from standard lines companies is their willingness to cut more business in a particular niche if pricing becomes too competitive, and then aggressively expand their book again when market conditions improve,” Standard & Poor’s said. “Standard lines companies, which are more concerned with maintaining customer relationships, might be less willing to see their revenues fall to the same degree.”

Using 2014 data, Standard & Poor’s ranks W.R. Berkley Corp. highest among specialty insurers in terms of gross premiums written ($7 billion). HCC scores number one in terms of average combined ratio (83.7), and RLI gets the top slot in terms of average return on revenue (24.3 percent).

Out of the 13 standouts S&P cites, Ironshore is at the bottom in terms of combined ratio (100.5), and Argo Group lands at number 13 in terms of average return on revenue (5.1 percent).

American Financial scores at the highest in terms of net investment yield (4.9 percent), while OneBeacon Insurance produces an investment yield that places it at number 13 (2.1 percent).

Source: Standard & Poor’s

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