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Alternative capital making reinsurance consolidation 'inevitable': Report


Reinsurance sector consolidation “is inevitable” due to factors led by the entry of abundant alternative capital into the reinsurance market, Nomura Securities International Inc. said Thursday in a report.

“The Evolution of Reinsurance: Soft Market to Spur M&A,” authored by San Francisco-based Nomura analyst Cliff Gallant, says that the reinsurance industry “is now witnessing a tidal wave of alternative reinsurance issuance in the form of catastrophe bonds, collateralized reinsurance, retrocessional reinsurance and industry-loss warranties.”

Citing figures from Aon Benfield Group Ltd., the report adds that such alternative capacity available in the reinsurance markets could double over the next three to five years.

Such alternative capacity creates attractive insurance products that are becoming more popular. “As a risk management product, cat bonds are less expensive than traditional capacity and are fully collateralized,” said the Nomura report. Alternative reinsurance also presents investors with a noncorrelated asset class with which to diversify portfolios, the report added.

Weakening reinsurance prices are one result of the inflow of alternative capacity, according to the report.

“Prices in the property and catastrophe reinsurance market are already down double-digit percentages since 2012 in what appears to be a traditional soft market free fall,” said the report.

This should lead to industry consolidation, the Nomura report said. “While the expectation for (mergers and acquisitions) in Bermuda has long been discussed, we view that the current pricing environment will be the driver that will force the hand of previously unwilling participants.”

The consolidation will likely affect the entire reinsurance business, led by the property/casualty space.

“We expect consolidation to be industrywide. Initially, we expect the pressures to be greatest in the areas where the business models are under direct attack, such as property and catastrophe reinsurance,” said the report.