M&A to accelerate as rates come under pressure: AM Best

Consolidation in the reinsurance industry is likely to continue as the sector battles with pricing pressure and competition from alternative capital, according to AM Best. Despite catastrophe losses totalling more than $100bn in 2017, the 1 January 2018 renewal season ended with only modest relief for pricing, while the midyear renewal was a “tremendous disappointment” for reinsurers, according to AM Best. “The reinsurance sector continues to skip along the bottom of the market with no clear trigger for a meaningful and widespread hardening. At the same time, the capital markets’ influence on the reinsurance sector continues to expand, replacing capacity lost in 2017 and then some,” AM Best said in its Global Reinsurance report, published earlier this week. The fizzling out of price increases in 2018 is tied to the ongoing flow of alternative capital into the reinsurance sector. Total reinsurance capital is estimated at $462bn for 2018, with $100bn coming from alternative capital markets, according to AM Best. Property catastrophe pricing is at the “mercy” of alternative capital and is not as heavily influenced by the traditional reinsurance market as historically has been the case, the ratings agency said. “Any hope for near-term improvement in the market is directly correlated to the current level of excess capacity in the overall market today. This is compounded by the continued inflow of alternative capacity that was seen in the fourth quarter of 2017 and through 2018,” according to AM Best. In the absence of market hardening, reinsurers are increasingly looking to mergers and acquisitions (M&A). The past year has seen an increase in M&A activity in the industry. Just last month, US insurer Hartford said it will acquire speciality insurer and reinsurer Navigators for $2.1bn. Pricing pressure is likely to lead to further M&A, driven by the need for reinsurers to achieve scale and diversification, according to Robert DeRose, senior director at AM Best, who took part in an AM Best webinar. M&A activity may in fact accelerate as a result of the pricing environment, alternative capital and increased cost of regulation for reinsurers, according to John Doucette, president and chief executive officer for reinsurance operations at Everest Re, who also took part in the webinar. “With tough market trends and intense competition, conditions remain ripe for mergers and acquisitions to continue over the next few years. Companies are flush with capital, borrowing is still relatively inexpensive, there are limited opportunities for profitable organic growth and some reinsurers are struggling to cover the cost of capital, all of which puts M&A on the table,” AM Best states in its report. Reinsurers are seeking to create larger, global and well-diversified operations, with an eye to passing risk on to capital markets, according to AM Best. Consolidation is most likely among smaller and mid-sized reinsurers and specialist insurers. However, a large number of large insurers are acquiring reinsurers. Primary insurer AIG has acquired Validus, while AXA is in the process of buying XL Catlin. Just this week, news broke that French mutual insurance company Covéa has made a bid for French reinsurer SCOR. If done prudently, global reinsurance consolidation should help improve the efficiency of the market’s overall capacity and lead to greater operational discipline, according to AM Best. However, Greg Richardson, chief risk officer at Transatlantic Re, warned that too much consolidation would have a negative impact on “price discovery and risk taking”, which is achieved through syndication. “The presence of many players in the market actually serves a very valuable role,” he said. In another twist, insurers and reinsurers are looking to acquire alternative capital players. Last week, US specialty insurer Markel announced plans to acquire insurance-linked securities fund manager Nephila Capital, adding to its own alternative capital unit CATCo. The deal followed news that private equity group Apollo Fund is to acquire insurer and reinsurer Aspen. “Nephila Capital’s [acquisition] by Markel Corporation and Apollo Fund’s acquisition of Aspen appear to be a natural progression in the evolution of alternative capital and the global (re)insurance sector. These transactions are the latest in an accelerating trend of alliances between traditional and alternative capital providers,” said AM Best. Renaissance Re, Hannover Re and Swiss Re were pioneers in forging partnerships with alternative capital over the years, but more recently the pace has stepped up, according AM Best. Canada Pension Plan Investment Board’s acquisition of Ascot, Allied World’s investment in Aeolus and Markel’s previous acquisition of CATCo, are all examples of a direct strategic alignment between traditional and alternative capacity. According to Mr Doucette and Mr DeRose, the industry is moving towards a partnership model, where reinsurers work alongside alternative capital, as well as insurtech firms. This should reduce the cost of capital for reinsurers, as well as lower expenses, and create a better value proposition for customers, they said. However, while alternative capital is “here to stay”, it will most likely “struggle” to expand beyond property catastrophe risks in a size or scale that would impact the industry, according to Mr Doucette.

M&A to accelerate as rates come under pressure: AM Best

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