Industry Observers: Reinsurers, Insurers Seek to Combine Forces Through Mergers and Acquisitions
April 26, 2018 by David Pilla
OLDWICK, N.J. – Reinsurers and insurers are seeking greater market clout through mergers and acquisitions amid soft pricing conditions and competition, according to industry observers. The pending acquisitions of Validus Holdings Ltd. by American International Group Inc. and of XL Group Ltd. by Axa SA show that appetite for the deal remains strong.
Nicholas Bradley, partner and head of insurance, London-based law firm Pinsent Masons LLP, said a long soft-market period is one of the drivers of the M&A activity. That soft market has squeezed margins, leading to a desire for economy of scale.
“Although current market conditions appear to be stabilizing, competition remains intense and quality of earnings remains under pressure,” said Robert DeRose, senior director, A.M. Best. “Companies are flush with capital, borrowing is still relatively inexpensive, opportunities for organic growth are limited and some companies are struggling to cover the cost of capital, which puts M&A on the table. All this is sustaining the need for further M&A activity and A.M. Best believes that consolidation will continue, particularly among smaller players in the market as acceptable returns become increasingly harder to achieve. If done prudently, should help improve the efficiency of the market’s overall capacity and lead to greater operational discipline.”
M&A is driven by multiple elements but three factors have influenced most recent deals, said David Flandro, global head of analytics, JLT Re. “First, it has been increasingly challenging for reinsurers to meet their own return hurdles as prices have fallen and yields have stayed low post-2012,” he said. “Second, insurance and industrial conglomerates with larger balance sheets and lower costs of capital have been able to consolidate reinsurers’ operations profitably thereby lowering those return hurdles.”
A third factor is that “periods of high valuations since the end of the financial crisis have been sufficient to pique reinsurers’ interest and make them ask ‘what if?’.”
Flandro said he doesn’t believe there has been a recent, cyclical acceleration, “although there have certainly been some high-profile deals.” There has been a steady stream of reinsurer M&A over the last decade, he said. London and Bermuda had over 20 quoted reinsurers between them as recently as 2010 — a number which could conceivably go below five by the end of 2018. “So this has been happening for quite a long time,” he said.
Lex Baugh, chief executive officer of North American general insurance at American International Group Inc., said in a recent A.M. BestTV panel discussion that M&A is bringing capacity to markets to “be able to continue to expand and continue to be able to develop their business. I think overall that’s pro-competitive for the market” (Best’s News Service, April 15, 2018).
Greg Hendrick, president of property/casualty for XL Catlin, said in the panel discussion that for XL, recently the seller in a big M&A deal, as for AIG, the buyer in the acquisition of Validus, it comes down to “the need for scale and relevance.”
Bradley said the deal that changed the M&A game for many in the market was the acquisition of Chubb Corp. by Ace Ltd. “Companies thought to be too big to acquire or be acquired were suddenly in play,” he said. “That has probably led to M&A activity in the reinsurance field becoming high profile.”
Ace Ltd. completed its $29.5 billion acquisition of Chubb Corp. and assumed the Chubb name early in 2016 (Best’s News Service, Jan. 15, 2016).
Bradley said the Chubb deal together with latest acquisition announcement – the $15.3 billion proposed acquisition by Axa of XL Group – show that “nobody’s too big to be in the game.”
The recent M&A deals involving both insurers and reinsurers raise the question of whether pure-play reinsurers can stay in the game. Peter Allen, partner in the insurance practice with accounting and advisory firm Moore Stephens LLP in London, said the case can be made.
“In fact, in the long term I think you can make more of a case for the specialist reinsurer than you can for the specialty P&C direct writer,” he said. “The latter are very vulnerable to the outsourcing of underwriting to managing general agents and other delegated underwriters, and that vulnerability is only increased by digital. Whereas you’re always going to need ultimate eaters and absorbers of risk – specialist reinsurers possibly augmented by alternative capital. I don’t think these guys are going away any time soon.”
“There are very few pure property/casualty reinsurers today, most have multiple forms of distribution and most engage third-party capacity,” said DeRose. “Those that are pure, Trans Re, for example, are not publicly traded anymore and therefore do not have to be focused on top line growth, but can remain disciplined through the various phases of the property/casualty market cycle.”
Pure reinsurers can do well if they have the size and agility, Munich Re being the best example, said Bradley. “It’s tough at the moment for pure reinsurers, but those that combine scale with agility to meet market demands as they change will survive, but there will be a small number of them,” Bradley said.
Flandro said the stand-alone reinsurance model “is still frequently the best model for entering new markets, exploiting comparative advantages and developing competitive expertise.” He added that stand-alone reinsurers still comprise the largest proportion of premiums in the reinsurance market, although there are fewer stand-alone, quoted carriers now than there have been since the 1990s.
Underwriting affiliates of American International Group Inc., Validus Holdings Ltd. and XL Group Ltd. are rated A (Excellent) by A.M. Best.
(By David Pilla, news editor, BestWeek: David.Pilla@ambest.com)
