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Bermuda re/insurers Argo and RenaissanceRe have both received unwanted attention from so-called activist investors. As the trend gains traction globally, other players may need to brace themselves for similar challenges. Bermuda:Re+ILS investigates.
Chief executives are usually pretty thick-skinned—it comes with the territory. But Mark Watson, the chief executive officer of Argo Group, must be wishing he was more armour-plated, given the attacks he has endured of late.
In recent months, the Bermuda market has been somewhat astounded by the remarkable and very public war of words between investor Voce Capital and the board of the Argo Group, in which Voce owns a 5.8 percent stake.
In early March, Voce published an open letter demanding that a number of new non-executive directors be added to the Argo board in order, it said, to initiate a change of culture at the company and improve its performance.
As yet, however, Voce has made very few specific demands about changes at the company.
The letter also launched an extraordinary personal attack on Watson, accusing him of effectively misappropriating company funds. It alleges there is almost no distinction between his personal life and interests and the way company funds were spent.
The exchange stunned many observers but perhaps they should not have been surprised. The incident echoed the experience of RenaissanceRe last September when TimesSquare Capital Management, an asset management firm with a significant stake in the Bermuda reinsurer, published a letter calling for the company to implement an immediate review of strategic alternatives, including an exploration of a potential sale of the company.
TimesSquare had done its research and made a compelling case that RenRe’s valuation was falling way below that of many of its peers and, given the way the industry is evolving, claimed that it had a “diminished conviction that RenRe’s share price will appropriately reflect intrinsic value”.
TimesSquare, which had been an investor in RenRe since 2008, stressed the “structural transformation” of the reinsurer’s core property-cat since then, driven by the growing participation of alternative capital and the fact that the pricing response following large loss events has been significantly dampened as a result of the latter.
It also argued that RenRe was gaining no obvious value from being a standalone reinsurer and this has not resulted in an improved valuation over the years, despite the fact that acquisitions of peer companies have been generally consummated at escalating valuation multiples over the past two years.
In short, TimesSquare suggested that for RenRe to realise its intrinsic value it should conduct a thorough review of strategic alternatives, including a possible sale of the company.
It went on to say that it believes a number of potential acquirers would covet RenRe’s “dominant and unique” position in third party capital management, and track record of “superior underwriting”, and that “an active competitive sale process for the company should be launched, which would likely yield a significant control premium over the current share price”.
In the case of RenRe, the letter did pre-empt change, although not in the form TimesSquare demanded. Just months after the letter was sent, which RenRe initially responded to in a very non-committal way, the reinsurer revealed two major strategic changes. It would buy Tokio Marine’s reinsurance platform TMR, which includes Tokio Millennium Re and Tokio Millennium Re (UK).
It also revealed that State Farm Mutual Automobile Insurance had agreed to invest $250 million in RenRe, resulting in its owning almost 5 percent of the reinsurer. It had already previously invested in RenRe-managed vehicles Top Layer Reinsurance and DaVinciRe.
To what extent the actions by TimesSquare prompted these strategic decisions at State Farm may never be known—certainly the RenRe board has made no reference to pressure from the shareholder beyond its initial response.
Just the start
The Argo and RenRe debacles are just the latest incident to hit the insurance industry and are reflective of a growing trend in the wider corporate world.
Some are now claiming that re/insurers in all corners of the world should prepare for more of the same—and start considering their own tactics should they be targeted by so-called activist investors in the way Argo has been.
Financial institutions have traditionally been somewhat shielded from shareholder activists because of regulation. But this is clearly changing: activists are increasingly targeting financial institutions. It could be only a matter of time before we see more cases in the re/insurance sector.
Ed Gunn, director of M&A Operations at Deloitte and one of the authors of a report released in December 2018 called ‘Be your own activist: Developing an activist mindset’, says that while large institutional investors historically pursued purely financial strategies and kept a low profile in governance, this may no longer be the case.
Gunn says that while activist investors have always been around in various forms, such activity is becoming more commonplace.
“This is a business model that has been part of the fabric of the US capital markets for some time,” he says. “The difference now seems to be that they are becoming more active. It is a tactic also being employed by bigger investors in some instances and we are increasingly seeing it used in other parts of the world such as Europe and Asia.”
He explains that activist investors are typically small but very sophisticated operations that do a lot of due diligence seeking underperforming companies where their value and/or shareholder returns are a lot lower than those of their peers.
“They are looking at their strategy and performance and whether they have used capital in the best way, and looking at the wider trends in that sector to see what is possible,” Gunn explains. “What do the best performing companies in the sector look like and what changes can be made at the target to bring them closer to that?”
Jason Caulfield, global head of value creation services at Deloitte and also an author of the report, explains that the sole aim of these investors is to trigger a significant change in the share price—as quickly as possible.
“That is a very different investment mindset compared with a more traditional pension fund seeking a long-term return that is also stable,” Caulfield says.
He says that the investor will usually engage with management in the first instance. Depending on the reception they receive and their wider strategy, some may go public faster than others. It very rarely backfires to go public, he says. “By bringing wider attention to the issue, things usually start moving faster.”
He adds: “Global activism is rising and activists are putting their money where their mouth is, more than doubling (110 percent increase) the value of newly deployed funds in the last 12 months compared to 2014.
“Activists are better prepared than ever before. They spend considerable time undertaking sophisticated analysis to finesse their demand thesis and have stepped up their strategy by courting passive shareholders well in advance in order to influence crucial votes in their favour.”
The ripple effect
According to a 2018 report by Activist Insight, the number of companies around the globe receiving governance-related proposals from activists has steadily increased, with growth averaging about 11 percent for the last four years and campaigns targeting 805 companies worldwide in 2017.
The pool of funds deployed in these campaigns is expanding, reaching over $200 billion in 2016, up from just $47 billion in 2010. The movement is also expanding geographically: approximately 20 percent of total activist shareholder funds are now deployed outside the English-speaking world—and national campaigns have been launched in various European countries, including France, Germany, Switzerland, Italy and Spain.
According to the report by law firm Schulte Roth & Zabel (SRZ), Activist Insight and Okapi Partners, which is based on an August 2018 survey of activist funds, 72 percent of respondents expect to raise “some” or “a lot of” new capital in the next year.
Given the rise in the phenomena of activist investors, some re/insurers may consider putting in place a strategy to avoid ending up being targeted and, if they are, around how to best deal with the problem.
This is not easy, says Gunn from Deloitte. The best advice, he says, is to simply ensure the company is not underperforming in relation to its peers in the first place.
“If your performance is not what it should be, then you might be concerned. The best advice really is to run the ruler over your performance on a regular basis and have the structure and people to challenge whether your value creation plan for the company is as good as it could be.
“It is important to think that way. Consider how an activist investor might suggest a dramatic change in strategic plans to create value and consider all options. Finally, ensure you are clearly articulating your plans to existing investors and the wider market so that it is in the public domain. That way, activist investors have far less traction to begin with.”
Once a company is targeted, however, Gunn recommends that the best approach initially is to listen and take the approach seriously. “There is no doubt that it can be very difficult to control, especially once it goes public. Ideally, you want to avoid being targeted in the first place and, if you are, to try and keep them on side,” he advises.
Caulfield adds: “Don’t try and dismiss having dialogue with any investors, no matter how marginal and, where you can, address any vulnerabilities. Engage with them but try not to allow them to set the agenda.”
In the cases of RenRe and Argo, both suggested in their responses to their investors going public that engagement had been tricky.
Argo, in its response, said: “Argo’s board of directors and management welcome input from all our shareholders and take into account their views. In that spirit, we were looking forward to continuing our dialogue with Voce, but are disappointed that Voce has decided not to engage us constructively.
“Instead, Voce has sent a letter to shareholders that contains a number of misleading and inaccurate statements and personally attacks the company’s CEO, ignoring Argo’s track record of strong value creation for all shareholders.” It went on to offer figures that, it said, show this.
A statement released by RenRe, responding to TimesSquare, said: “RenaissanceRe welcomes open and constructive communications with all shareholders and values their input. In this regard, members of our senior management team have held numerous meetings with TimesSquare over the past few years.”
It added: “We will maintain an open and active dialogue with all our shareholders as we continue to work to enhance shareholder value.”
Caulfield admits that in some instances, there may be little a company can do.
“This is another lens on the capital markets and it means companies will have to be even sharper than before on their performance. No sector is immune from this; it is very much a global phenomenon.
“They do need regulatory regimes that give the appropriate shareholder rights, but other than that no company that is underperforming is safe.”
RenaissanceRe, Argo Group, TimesSquare, Voce Capital Management, Bermuda