Willis Re says reinsurance cycle under ‘extreme strain’ and ILS funds not immune

The broker said that there is an 'urgent-and ever increasing-need for change' across the reinsurance industry as it forms a 'new paradigm'. The statements were made in Willis Re's "1st View" renewals report in which it concluded that there is now a clear sense of urgency as reinsurers seek to implement 'major changes' to their strategies and business models. The broker said that this need for change is compounded by the growing transparency of major buyers around their 'core partner strategies', and their reluctance to deal with smaller following markets.hideAs underlined by the latest deal between Endurance and Montpelier, Willis Re said that M&A activity among reinsurers also continues to gather pace. The broker said that because the pool of potential partners is shrinking, aspiring consolidators are now 'increasingly concerned about missing out on what many observe to be industry change that could last across generations'. The report also highlights that insurance-linked securities (ILS) funds are not immune from the current market challenges. Willis Re said that reduced returns and the downward pressure on fees places the business models of some smaller standalone ILS managers 'under duress'. Peter Hearn, Global Chairman, Willis Re, said: "ILS fund managers evolving into more traditional reinsurer models and reinsurers expanding their own fund management activities appear best placed to trade through this difficult period; they can manage investors and access business more effectively. "But while this convergence trend is both logical and anticipated, it is creating a conundrum: as ILS funds evolve their business models to look more like traditional reinsurers, they are diluting the differentiation of the very offering which has proved so attractive to date for major primary buyers." Interestingly one of the main reasons cited by Endurance to buy Montpelier is to acquire the latter's established third party capital management franchise. John Cavanagh, Global CEO of Willis Re, added: "The April 2015 renewal season has reinforced current trends and the market continues to favour the buyer. There are no signs that the current tide of falling rates and widening terms and conditions will be reversed. Diversification is now the key competitive advantage in this increasingly consolidated and converged reinsurance industry, and the ability to deliver a differentiated service offering is critical. Everyone should be broadening their horizons." Mr Cavanagh concluded: "As investment banks rush to orchestrate the new model reinsurers of the future, previous views about possible M&A transactions are being challenged, including any thoughts that size may be an obstacle. "As ever, the key to a successful transaction is demonstrating that the combination of two entities is greater than the sum of the two parts. Perversely, this imperative is likely to increase competition in the short to medium term, which may prolong the current soft market. Analysts are increasingly concentrating on the portfolio make-up of any potential new entity-and reinsurance is being seen as less attractive than specialty insurance business." Also this week credit rating agency AM Best published an analysis on the results recently posted by the major European reinsurers that showed continued decent profits despite the competitive conditions. But it said there are limited growth opportunities. The credit rating agency said that its analysis of the full-year financials for Lloyd's and the four largest European reinsurers-Munich Re, Swiss Re, Hannover Re and SCOR SE-demonstrates that underwriting results have been profitable largely because of the absence of sizeable natural catastrophes and ongoing reserve releases. AM Best identified key trends for the biggest reinsurers, as well as six listed (re)insurers that operate at Lloyd's-Amlin, Beazley, Brit, Catlin, Hiscox and Novae. It said that these companies continue to focus on capital management, resulting in share buy-backs and increased dividend payments, as well as the repurchase and replacement of existing hybrid debt. "The quest for yield is leading to an adjustment in investment portfolios, although London Market companies remain more conservative. Reinsurers face challenges as soft market conditions persist and concerns mount regarding the sustainability of reserve releases. Organic growth is limited, with rates remaining under pressure and certain lines of business underperforming, leading to a need to underwrite risks more selectively," stated AM Best. As a result, reinsurers are not surprisingly seeking opportunities for expansion into emerging markets and new lines of business, said the credit rating agency.

Willis Re says reinsurance cycle under ‘extreme strain’ and ILS funds not immune

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