Hurricane Harvey likely won’t spur reinsurance PE deals in overcapitalized market

Don’t expect Hurricane Harvey to spur a rush of private equity investment in reinsurance, according to sources.

PE firms have historically been big investors in the sector. The reinsurance sector, however, has changed since the Sept. 11, 2001 terrorist attack, one banker said. Too much capital is chasing not enough business, people said.

PE returns for the last major wave of reinsurers, formed in 2005 after Hurricanes Katrina, William and Rita, were “modest at best,” the source said. Launching a new reinsurer is considered too costly and time-consuming and “it takes too long to produce attractive returns,” the banker said.

Instead, capital is now flowing more quickly through structures like sidecars and insurance-linked securities, the source said.

Hurricane Harvey, downgraded to a tropical storm, has pounded Texas with constant rain since Friday. At least five people have been killed and more than a dozen injured, the New York Times reported.

Houston, the nation’s fourth largest city, has been one of the hardest hit cities with countless residents trapped in flooded homes, the story said.

Losses from Hurricane Harvey are unclear, one PE executive said. Harvey may be a horrible event but it’s probably not enough to spur the formation of new reinsurers, sources said. “It’s likely that the existing players with lots of cash will fill the void,” the exec said.

PE investment in reinsurance has also been meager.

As of Aug. 28, 27 U.S. reinsurance M&A deals with disclosed value of $11.4 billion have been announced, data from Thomson Reuters shows. This compares with 27 M&A transactions collecting $1.3 billion in the year-earlier period, Thomson Reuters said.

Of the 27 reinsurance deals so far in 2017, only three involved PE, Thomson Reuters said. The transactions include HPS Investment Partners’ investment in NFP; New Mountain Capital’s buy of OneDigital Health & Benefits; and Oak Hill Capital’s acquisition of Edgewood Partners Insurance.

Some of the biggest PE investors in reinsurers include:

  • Stone Point Capital, the former PE unit of Marsh & McLennan, owns KaylaRe, a Bermuda reinsurer, in which it invested in December, and New Point.
  • Pine Brook, along with Crestview Partners and CVC Capital Partners, invested in Fidelis Insurance Holdings Ltd, a specialty insurance and reinsurance provider, in 2015. Pine Brook has also backed Third Point Reinsurance, which went public in 2013, and Vibe Syndicate Management.
  • Aquiline Capital owns Beach & Associates. It has exited Validus Group HoldingsGroup Ark Insurance and Wright Insurance Group.
  • Blackstone Group has historically been a major reinsurance investor. Investments have included Ariel Re, Aspen and LaSalle Re. Blackstone and AXIS Capital Ltd launched Harrington Re Ltd in 2016.
  • Berkshire Hathaway, the company run by Warren Buffett, is a major insurance investor (Geico). It even has its own reinsurance group.

Correction: A prior version of this story said that Aquiline still owned Validus and Group Ark. They do not. Aquiline is currently an investor of Beach & Associates. The story has been corrected. 

Stone Point, Aquiline, Blackstone and Berkshire Hathaway could not be reached for comment.

Action Item: Contact Jeff Greenberg, Aquiline chairman and CEO, at +1 212-624-9500

Texas National Guard soldiers assisting citizens in heavily flooded areas from the storms of Hurricane Harvey in Houston on Aug. 27, 2017. Photo courtesy Lt. Zachary West/U.S. Texas Military Department/Handout via Reuters