Softly, softly...

Ever heard of the English proverb ‘softly, softly, catchee monkey’? Bermudian carrier Arch Capital clearly has.

Last night, The Insurance Insider revealed that the Dinos Iordanou-led specialty (re)insurer had made a number of friendly approaches to acquire its rival Axis Capital over the past few years. 

So far, these attempts to persuade Axis to enter into discussions have amounted to nought – largely because both Axis founder John Charman and his successor Albert Benchimol have shown no interest in selling out to anyone. 

The winds may be about to change however. Axis – as readers will know – is currently proposing a $6.45bn acquisition of PartnerRe, a bid which is being challenged by the Agnelli family’s investment vehicle Exor.

But the risk of M&A is that when they fail, it can put the bidder in play, because the implication is that it is itself sub-scale or currently deficient in some area. 

A year ago this would be a preposterous suggestion for Axis. But, in a post XL-Catlin world, the minimum scale threshold is rising for “tier one” (re)insurers. Therefore, it is not implausible to assume that Axis could become a target if its PartnerRe deal fails to complete.

And given its valuation, balance sheet and strong shareholder support, Arch is certainly in a position to finance such a transaction. It has a market capitalisation of $7.83bn, common shareholder equity of $6.29bn and trades at 1.32x book value. 

Assuming a typical control premium of 20-30 percent, Arch would likely be able to finance a cash-and-paper deal without diluting its share price. 

One question, of course, is whether now is the right time to significantly increase one’s specialty insurance and reinsurance presence. 

But maybe the canny Iordanou - like the Agnelli’s - feels the doom-mongering around the international (re)insurance market is a little overdone. It’s going to be interesting to watch what happens next…