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Rates still low despite increase in reinsurer mergers

Capital remains abundant as companies aim for economies of scale, cedents retain risk

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Ongoing mergers among reinsurers may reduce buyer choice, but it also has helped keep reinsurance rates low.

At the same time, cedents have been reducing the number of reinsurers with which they do business, experts say.

A need for greater size and diverse business drove many recent deals that include the mergers of XL Group P.L.C. and Catlin Group Ltd., Mitsui Sumitomo Insurance Co. Ltd.'s acquisition of London-based Amlin P.L.C., and Exor S.p.A.'s purchase of PartnerRe Ltd., experts say.

In many cases, the mergers have been “responsible moves” that helped the companies gain needed scale or diversify, said Dennis Sugrue, a director of insurance ratings at Standard & Poor's Corp. in London.

But the deals have not removed a large amount of capital from the market, so intense competition for reinsurance business has not been greatly reduced, he said.

Indeed, the newly merged reinsurers may feel pressure to grow to justify their enlarged capital bases and result in more competition, Mr. Sugrue said.

Likely additional industry consolidation could involve London- or Bermuda-based reinsurers that want to increase scale and/or diversify their books of business, both of which are hard to achieve organically or involve investors from Asia, he said.

Mergers and acquisitions likely will continue as competitive pressures mount, particularly for small and medium-size reinsurers, said Brian Schneider, a director at Fitch Ratings Ltd. in Chicago.

In many cases, mergers may be driven by regulatory issues, such as Europe's Solvency II capital requirements that will take effect in January, as well as globalization and competitive market conditions, said Clive O'Connell, a partner at law firm Goldberg Segalla Global L.L.P. in London.

Two main factors are driving reinsurer M&As — the desire to expand a company's footprint and/or capitalize on prospective synergies, said Andrew Holderness, global head of the corporate insurance group at Clyde & Co. L.L.P. in London.

The consolidation has exacerbated a trend among buyers to use smaller panels of reinsurers, said Alex Moczarski, London-based president and CEO of Guy Carpenter & Co. L.L.C.

While some cedents may buy from fewer reinsurers because there are fewer reinsurers from which to buy, “it is not a straight equation,” said Mr. Moczarski.

The increased competition should work to cedents' advantage by letting them buy coverage for a good price, said Nick Frankland, London-based CEO of Europe, Middle East and Africa at Guy Carpenter.

The current M&A trend likely will not stop reinsurance rates from falling slightly further, said Martyn Street, senior director at Fitch Ratings in London.

Recent mergers represent about 8% of the reinsurance sector's dedicated capital, so they are not expected to have a major effect on rates, said David Flandro, head of analytics at JLT Re, the reinsurance arm of Jardine Lloyd Thompson Group P.L.C., in New York.

In the straight reinsurer M&As, capital returned to shareholders so far has not been “meaningful enough to change” the competitive market dynamics, said Bryon Ehrhart, CEO of Aon Benfield Americas, a unit of Aon P.L.C.

As a company enlarged by a merger this year, XL Catlin sees advantages of greater scale, along with opportunities in certain product lines, such as credit and surety, and territories, such as Latin America, from the combined companies' expertise, said Greg Hendrick, CEO of reinsurance in Stamford, Connecticut.

Increasingly, reinsurers need such scale and capacity to underwrite their customer's risks, said Denis Kessler, CEO of Paris-based reinsurer Scor S.E., and M&As are one route to achieve that as well as diversification.

While much of Scor's growth is organic, its 2013 acquisition of Generali USA Life Reassurance, for example, was based partly on greater diversification and size, he said.

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