Large-scale M&A activity will continue as carriers seek scale and diversification, Willis Re has predicted.
At a press conference at the Monte Carlo Rendez-Vous, senior Willis Re representatives said they did not predict a slowdown in deal activity, which has included AIG buying Validus, Axa purchasing XL Catlin and The Hartford agreeing to acquire Navigators.
Global head of casualty Andrew Newman said the fundamentals continued to make M&A attractive, as carriers attempted to lower their cost of capital by increasing scale.
Global CEO James Kent said the reduction in the rate of corporation tax in the US had accelerated the pace of M&A among US-domiciled carriers. He noted that there were no significant US deals during 2014-2016.
Willis Re International chairman James Vickers added the caveat that although diversification was an incentive for M&A, carriers would pull out of unprofitable lines of business rather than maintain them for the sake of balancing their portfolios.
Vickers noted very different social issues at play in the current wave of acquisitions. Whereas during the last M&A cycle in which insurers had acquired reinsurance groups in the 1990s most insurance CEOs had risen through the ranks of their respective organisations, many current leaders were “outsiders” with more experience in corporate finance and M&A.
He added that better analytics provided deeper insights into the true value of potential acquisitions and that insurance acquirers were now much more confident of the financial positions of the businesses they were buying.
Property cat pricing had entered a “new norm” in which highs and lows were muted, Kent said.
ILS capital has had a significant impact on pricing, Kent said, but had moved from being a “disruptor” of the industry to an “enabler” of more sophisticated risk transfer, with “all forms of capital converging” within carriers through M&A.
Vickers said that increasingly, public sector entities such as governments were looking to buy cover, and that reinsurance would make this possible.
However, he added that closing the protection gap by insuring public sector entities was a challenge.
While he noted there had been better public and private sector collaboration recently, Vickers said (re)insurers had previously approached governments but were “talking a different language”.
“You go to a government and try to explain what a model is and they think you’re from Mars,” Vickers said.
He added that ratings agencies were beginning to take more account of companies’ climate change exposures, and that protection against climate risk presented the (re)insurance industry with an opportunity.
Citing figures from the broker’s first-half reinsurance market report, which was published on 6 September, Kent said the reported return on equity within its set of 21 reinsurers was 8.5 percent, up by just 0.1 point from the same period last year.
The broker noted this as a sign of stabilisation following a period of deterioration during 2015 and 2016.
The combined ratio of the cohort was 93.3 percent, an improvement of 0.7 points from the same period last year.
