Global insurers have two key advantages: they can pay more and they can keep incumbent management in post
When industry leaders talk openly of the need for consolidation, it rightly tends to get people’s attention.
When the industry leader is CEO of one of the top two major global reinsurers and those comments are made to a major financial newspaper read by all his institutional shareholders, the focus should be laser-sharp.
It’s therefore a shame that a recent Financial Times interview with Christian Mumenthaler of Swiss Re fell into the partial news blackout of the holiday season, or indeed that it wasn’t a little more in-depth.
Mumenthaler said a consolidation deal in the reinsurance space would produce some “huge synergies”. He also signalled interest in corporate insurance acquisitions. The only impediment was sellers were still seeking unrealistic prices.
So Swiss Re has publicly signalled that it will be a buyer if prices for rivals are more reasonable.
It has been a very long time since any P&C reinsurance consolidation happened involving members of the global top ten.
Scor-Converium was way back in 2007, preceded by Swiss Re taking out GE Insurance Solutions in 2005.
Berkshire-Gen Re was 1998 and Munich Re-American Re was way back in 1996.
After a 12-year break, might 2019 be the year of major reinsurance consolidation?
The logic is perfectly ruthless.
Excess capacity, lacklustre performance, an expense problem and the muted response of reinsurance pricing to two horrendous cat years do indeed all point to a need to consolidate.
And contrary to what Mumenthaler hinted to the FT, the prices for publicly traded reinsurers are historically low, even if their required take-out prices may be too high for his liking.
It is the Bermudians that are vulnerable. Those trading on the lowest multiples could be tasty morsels should buyers feel the synergy numbers exceed the take-out premiums and executive exit deals required.
The trouble is for buyers like Swiss or Munich the revenue dis-synergies of any such deals surely tip the balance the wrong way?
Plus their own price-to-book multiples are among the lowest in the cohort, restricting their manoeuvrability on price. Bolt-ons make no sense if they are dilutive.
I’m always happy to be proven wrong, but barring major unexpected impairments and fire sale rescue takeovers, genuine consolidation led by the reinsurance majors doesn’t seem any more likely in 2019 than it was last year.
Diversification deals that tie up global insurers and the remaining specialty (re)insurers still look the more likely game to me.
Global insurers have two key advantages: they can pay more and they can keep incumbent management in post. Capital is plentiful, but niche reinsurance talent is in short supply.
And despite the sector’s many woes, pricing has at least found a floor which may help external buyers believe that the reinsurance market cycle has bottomed out and a favourable entry point has been reached.
When prospective diversification and growth combine with some easy-win cost savings and a low risk of execution, deals can be made to look strategically compelling.
The grass really is greener in the next field.
For this reason, Swiss Re’s next buy is far more likely to be something to help fix its perennially misfiring corporate solutions division than a bid to extract notional capacity from the reinsurance world.