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Consolidation surge in reinsurance sector expected to continue

Consolidation surge in reinsurance sector expected to continue

Overcapacity, disappointing rates and the desire of cedents to be offered a broad array of products and services almost certainly guarantees that the ongoing wave of mergers and acquisitions in the reinsurance industry will continue.

That was a common refrain at the Rendez-Vous de Septembre in Monte Carlo, Monaco, in September, and it’s one shared by industry market analysts. Last year’s record hurricane season didn’t have a great impact on rates despite the hits taken by some reinsurance underwriters, and this year’s storms to date, including Hurricane Florence in September, are unlikely to move the needle significantly, observers say.

“You are going to see continued consolidation. Consolidations will pick up, but we will have to get through the wind season,” said Elyse Greenspan, director of equity research for property/casualty insurance at Wells Fargo Securities LLC in New York. “Florence will not be a significant event.”

Right now, buyers aren’t willing to take on all the cat risks this hurricane season, she said. “But when you get to the end of cat season and the results of the Jan. 1 renewals become known is when activity will pick up,” she said, noting that expectations are rates will be down at Jan. 1. In addition, there is an oversupply of capital out there, she said.

“As compressed margins persist, economies of scale, and therefore size of balance sheet, as well as breadth of offering … continue to be an important competitive advantage,” said Emmanuel Clarke, CEO of PartnerRe Ltd. in Bermuda, at the Rendez-Vous.

Large insurers are looking to work with reinsurers that offer all the capabilities they need, he said.

“We believe that the reinsurance market will consolidate to a large handful of large, relevant reinsurers who will be core to their clients, combined with a number of smaller either niche or commoditized players,” Mr. Clarke said.

“I believe that the merger and acquisition activity will continue this year and into next year. People are seeking economies of scale and seeking growth,” said Ulrich Wallin, CEO of Hannover Re SE in Hanover, Germany.

However, the reinsurer is not currently planning to make any acquisitions, he said. “Of course, we are always looking for opportunities for what you might call bolt-on acquisitions, but they would not be transforming,” Mr. Wallin said.

“In the property-catastrophe business, pricing has been in decline for the past couple of years due to influx of alternative capital and excess capacity,” said Hardeep Manku, Toronto-based director at S&P Global Ratings Inc. He said there has been a “commoditization” of the product, adding that while the sector got rate increases after the 2017 catastrophe losses, that momentum is fading.

Changing cedent expectations are playing a role in the consolidation of the sector as well, Mr. Manku said.

“Their needs vary, but they’re not looking just for capacity providers,” he said. Instead, cedents are looking for risk partners, someone they can strike up a relationship with, and for reinsurers that provide risk and capital management solutions. The larger cedents have trended to a centralized model of buying reinsurance with preference for dealing with fewer reinsurers that have stronger balance sheets, good product expertise and broad product offerings, said Mr. Manku, adding that there is “no letup in these trends.”

Reinsurers operating in the Bermuda market may be more likely to be involved in mergers and acquisition following the 2018 U.S. tax overhaul, Brian Schneider, senior director at Fitch Ratings Inc. in Chicago, said at the Rendez-Vous. The reforms curtailed Bermuda reinsurers’ ability to avoid tax on investments related to U.S. reinsurance business.

“It continues to be an advantage to be in Bermuda but certainly much less so than it has in the past,” Mr. Schneider said.

The remaining reinsurers may “decide to go out and gain some scale and be part of a larger organization,” he said.

The significant amount of capital in the reinsurance sector controlled by investors interested in the sector makes more acquisitions likely, said Steve Hearn, group CEO of Ed Broking Group Ltd. in London.

Ed has had several approaches from private equity firms interested in buying the brokerage, he said. Ed is owned by New York-based Lightyear Capital LLC, which bought predecessor firm Cooper Gay Swett & Crawford Ltd. in 2012.

The brokerage will likely be sold “when the time is right,” and the acquirer will be an investor “that understands the sector and backs us for our next phase of growth,” Mr. Hearn said, noting that Ed has added 170 staff since it rebranded in 2016.

The reinsurance brokerage sector will also be affected by the proposed acquisition of Jardine Lloyd Thompson Group PLC by Marsh & McLennan Cos. Inc., which was announced last month. When the transaction is completed, which is expected to be early next year, Marsh & McLennan’s Guy Carpenter & Co. LLC reinsurance brokerage unit will once again be the world’s largest, a spot it lost after what is now Aon PLC acquired Benfield Group Ltd. a decade ago.

“It’s not necessarily reinsurers that are being the buyers,” said Scott Mangan, an associate director in the property/ casualty ratings division of A.M. Best Co. Inc. in Oldwick, New Jersey, adding that third-party capital providers are in the market. “You’re seeing other companies that aren’t necessarily in the reinsurance space.”

“We could see valuations of 1.2 to 1.8 times book. As long as the price is right, there will always be buyers and sellers,” he said.

The median is somewhere close to 1.5 times price-tobook value based on deals over last few years, but it varies, said Mr. Manku. “The valuations move around due to a number of factors.”

Small reinsurers may find it harder to remain independent, although there will still be a place for some of them, according to observers.

“There is a role, but definition of smaller reinsurers is changing,” said Best’s Mr. Mangan. Smaller reinsurers will have to take advantage of value-added services like customer service and being able to create financial solutions, he said.

“We’ve seen that the definition of what constitutes small keeps getting larger,” said Mark Dwelle, director of insurance equity research at RBC Capital Markets LLC in Richmond, Virginia. He said that after Hurricane Andrew in 1992, $250 million was considered small, but now $2 billion in capitalization is. “My sense is we’ll continue to see a steady drip for the next couple of years, particularly if pricing remains soft.”

Looking ahead, Best’s Mr. Mangan sees the trend toward consolidation continuing, even though “there are certainly fewer targets out there than there were several years ago.” For the next one or two years, he expects “more of the same, but M&A often happens in spurts. As long as the market conditions persist as they are, which is very challenging, I think it will continue at a pace similar to what it has in the previous two or so years.”



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