The Pros and Cons of Going Private

In the days before hedge fund manager Daniel Loeb decided to drop the buyout of SiriusPoint, Carrier Management asked analysts at AM Best and Fitch Ratings about the pros and cons of taking insurers and reinsurers private.

Sridhar Manyem, senior director, Industry Research and Analytics at AM Best, said the upside of such a move is that it can reduce the pressure around quarterly earnings performance, stock market volatility and, to some degree, reduce shareholder activism.

“A stable capital and ownership structure with consistent goals and targets over the long term is beneficial, while abrupt changes in strategy due to ownership changes can be detrimental to a reinsurer’s business profile,” Manyem said in an emailed statement. “This is especially key in reinsurance given the importance and role of maintaining relationships, especially through challenging financial periods.”

See related story: Serious Change Underway at SiriusPoint

Brian Schneider, senior director, Fitch Ratings, commented that the primary benefit of insurers and reinsurers going private is to be able to better focus on any operating and underwriting improvements without having to deal with the continuous demands of public ownership. “This includes quarterly reporting and required SEC disclosures that command company time and add expense.”

On the other hand, Schneider said, the biggest disadvantage of private ownership is the reduced level of financial flexibility from having more limited access to the capital markets, which includes equity investors that lack the liquidity afforded to publicly traded companies.

Manyem noted that a key downside is that going private can limit a company’s ability to raise capital in the public markets. “The diminished financial flexibility can hinder short-term growth goals. It can also lead to a perceived lack of transparency regarding strategic objectives and key performance indicators, which may prevent benchmarking against competitors.”

However, Schneider said, the aspiration of the move is that once the company is able to attain its improvements, “it can command a higher valuation that would support a sale or IPO of the company and thus provide investor liquidity.”

This article first was published in Insurance Journal’s sister publication, Carrier Management.