Music may be the food of love, but in corporate matchmaking it?s about the money.

This Valentine?s Day, the Business section ? in a purely academic exercise ? takes a look at which companies might stand a chance of a happy marriage, and explain some of the reasons why.

The Bermuda market has not seen any significant M&A in the last five years. Expectations that a wave of new reinsurance companies formed in 2001 would eventually drive some M&A activity has amounted to little.

Observers have said the companies, which sell multiple types of insurance and reinsurance, are too broad to make a good fit with any other companies. The companies have grown significantly since being formed in 2001 but this has been either organic or through low-cost transactions, such as buying the renewal rights from a company either exiting the market or bowing out of selling a certain type of policy, and through the purchase of licensed shell companies.

The dearth of activity is in contrast to the slew of consolidations in the mid-to-late 1990s when established Bermuda insurers and reinsurers bought up peers established to provide property-catastrophe reinsurance capacity after 1992?s Hurricane Andrew.

There were also billion dollar acquisitions internationally by Bermuda companies, including Ace?s 1999 $3.45 billion purchase of Cigna?s property-casualty business, and Partner Re and XL?s purchase of parts of Swiss insurer Winterthur. In 1998 Partner Re bought the reinsurance operations of Winterthur, an important step in the company becoming a diversified, global reinsurer. And in 2001, XL purchased Winterthur International, a multi-national commercial insurance business.

Now, the Bermuda insurance sector is watching closely for signs of any M&A activity, with some suspecting the market may be too small too sustain its current crop of 40 major insurers and reinsurers. The market saw a surge in growth late last year as ten new insurance and reinsurance companies, backed by nearly $10 billion in capital, formed on the Island.

Typically insurance sector M&A is driven by soft market conditions, or when prices are falling, or already low. This could make imminent mergers or buy-outs unlikely given the hardening nature of today?s market. But if cupid?s arrow was to make an early mark on future marriage prospects, where could it land?

Imagine & Quanta?

Imagine, a Bermuda reinsurer, was rumoured last year to have been in courtship with one of Bermuda?s Front Street reinsurers. Although that romance appears to have fizzled, Imagine might still stand a chance of making a good match with another Island company. Cupid thinks Quanta Capital Holdings could be a potential love-interest for Imagine. Why? A merger between Quanta and Imagine could strengthen each company?s presence in the London market ? an area where each company has had a strong focus. The merger would also round out the breadth of sales with Quanta now focusing more attention on its insurance operations after bowing out of selling some types of reinsurance policies after being hit by heavy hurricane losses in 2004 and 2005. Imagine, which has operations in Bermuda, Barbados and Europe, sells specialist reinsurance policies around the world from its London operations.

A merger with Quanta could also pave the way for Imagine to become a publicly-listed company. Imagine, formed in 2000, is one of the few ?class four? Bermuda reinsurers to not have made its IPO debut. Quanta is listed on the Nasdaq.

Banding together could also be a good move on the executive search front, with both companies currently being run by interim officers after departures by the chief executives of each company in the last year.

Ram Re & Channel Re?

Ram Holdings Ltd., a Bermuda financial guaranty reinsurer, filed with the US Securities and Exchange Commission on Friday to become a public company.

The company does significant business with MBIA, the US municipal bond insurer. MBIA has also recently taken a stake in Ram Re.

A company in the IPO stage is usually looking to increase its access to capital to fund growth. Whether Ram Re wants to pursue an organic growth path or wants to grow through acquisitions isn?t known. But Cupid does wonder if it wouldn?t be worth a passing thought to consider a merger between Ram Re and Channel Reinsurance Ltd., at least once Ram Re has its IPO behind it. By partnering with Channel Re, another Bermuda financial guaranty reinsurer that MBIA also does business with and is a part owner of, Ram Re could readily increase its share of the financial guaranty reinsurance market.

A merger might also solve a headache for MBIA which has come under regulatory fire for some of its business arrangements with Channel. Ratings firm Standard & Poor?s last year said it was concerned that Channel Reinsurance Ltd. may have too few employees relative to the size of its portfolio and cut its outlook on the reinsurer?s debt rating to negative.

A merger would boost Channel Re?s five full-time staff, and reduce questions over how so few can oversee a $30 billion book of business.

White Mountains and Montpelier Re?

John (Jack) Byrne, chairman and former chief executive of White Mountains Insurance Group, has a reputation for scooping up undervalued companies.

Montpelier may be considered that by some observers right now, including by White Mountains. Montpelier, one of the biggest foreign issuers in the 2002 IPO market, has in recent months watched its stock fall to trading levels below its $20 IPO pricing. Yesterday Montpelier shares declined 35 cents to $17.65 in composite trading on the New York Stock Exchange. The company?s share price, over the last year, has traded as high as $43.10 but more recently has fallen as low as $16.33, on concerns over the company being hit by in the region of $1 billion in claims from 2005 natural catastrophes, including hurricanes that pounded the US. While Montpelier more than replaced its losses by tapping investors in the capital markets, the share price has yet to rebound. Investors could be waiting to see whether the company keeps its current loss estimates, or adds significantly to them when it reports fourth quarter and 2005 earnings on Thursday.

Montpelier isn?t an obvious takeover target for White Mountains. For one, White Mountains already owns a stake in Montpelier and has done since it led formation of the Bermuda reinsurer. On the other hand, Mr. Byrne is rarely one to follow convention, and he has a nose for a good bargain. He?ll certainly have a close eye on Montpelier, if nothing else. White Mountains had a seven percent stake in Montpelier, according to September 30 records.

Ace & who?

Ace is now big enough (it has a market capitalisation currently of nearly $17 billion) to be the potential buyer of any of its Bermuda peers. But Cupid suspects the Island?s biggest insurance company, which has been quietly downsizing its own Bermuda presence by shutting down some departments and relocating some staff to its US offices, is more apt to have its sights set on branching out through M&A activity in the Asian market rather than here. However, keen watchers of the Bermuda market have even raised the prospect of Ace swallowing up its neighbour, XL Capital. It is an unlikely but not impossible possibility since Ace has the buying power. XL?s current market capitalisation is around $11.5 billion.

Suitors looking to make a match with a Bermuda insurance company could also come from outside, with some observers saying the dollar?s weak value could tempt European buyers. That trend may already have begun internationally with Swiss Re?s acquisition of GE Insurance Solutions for $6.8 billion last November.

Starr and ...

If one heeds the words of former American International chief executive Maurice Greenberg, Cupid may find it a sensible move to steer clear of any matchmaking in the Bermuda insurance market this Valentine?s Day. Mr. Greenberg is reported to have said, in the past, that M&A activity between property-casualty insurers was akin to ?two drunks helping one another home?.

Of course, there has been speculation that Mr. Greenberg himself is poking around the Bermuda market for opportunities. Through several companies that he controls, including C.V. Starr & Co. and Starr International Company, a Bermuda investment company, Mr. Greenberg has access to billions of dollars to make investments.

A spokesman for Mr. Greenberg yesterday said that Mr. Greenberg has been adding personnel to both C.V. Starr and Starr International, which also has an office in Dublin, with the key aim of looking for investment opportunities around the globe.

?It is more than possible that he could be considering all kinds of companies,? the spokesman said, adding that Mr. Greenberg is not exclusively looking to make investments in the insurance sector. Mr. Greenberg told Bloomberg earlier this month that Asia is one market he is keen to invest in.

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