Reinsurer M&A is expected to be one of the key drivers of the reinsurance industry in 2016. Although we are almost halfway through the year, most reinsurance executives are anticipating more merger deals before the end of the year.
This came from a survey conducted by Xuber, the insurance software business of Xchanging, part of the CSC group.
Xuber’s Global Reinsurance Survey 2016
The survey, which can be accessed here, was taken from a sampling of senior executives in the reinsurance industry in April and May of 2016.
The top five challenges as voted by the respondents are soft market, regulation, maintaining underwriting discipline, improving returns in a low interest environment, and competition from third party capital. A comparison of the top five categories from 2015 to 2016 can be seen in this chart:
Soft market conditions are still clearly the main challenges facing the industry, while regulation has moved into sole second place behind maintaining underwriting discipline and improving returns. Many more executives listed regulation as their number one concern compared to last year. According to the survey report:
“Almost seven out of 10 (69 percent) listed it in their top five challenges – a sharp increase on the 51.2 percent last year.”
Opportunities Among the Challenges
While there are still some stiff challenges facing the industry, many see opportunities available for those perceptive and nimble enough to take advantage:
- Diversifying business portfolio – 24%
- Regulation – 21%
- Cyber – 15%
- Competition from 3rd Party Capital
- Competition from emerging markets
Of these, two are notable for the reaction of industry leaders: Regulation and the threat from Third Party Capital. The financial crisis of 2008 unleashed a flurry of new regulations around the world for the financial industry. While some industry executives see that as a threat, others see it as an opportunity. The increased regulatory environment is forcing companies to better gauge systemic risks. For example, Solvency II standards for capital means that those companies that can best understand and model the risks can compete better in the changing marketplace. Like regulation, many executives in the past viewed this entry of new capacity as a threat. However, recently we have seen a number of conventional reinsurers pair up with third party capital to improve efficiencies, increase capacity and broaden product offerings.
Reinsurer M&A for 2016
2015 went down as one of the largest years for M&A, both in terms of scale and number of deals. According to Xuber, 2015 saw $89 billion of transaction volume for 770 deals, which was almost three times the transaction level of the year before. The common themes for most of the transactions were: utilize existing capital, expand product and distribution, and geographic expansion.
Traditionally, mergers are promoted as a way of wringing costs out of the merged companies’ operations. But one significant challenge is making a cultural fit between the two enterprises. Without that cultural fit, the integration will be rocky and customer service can suffer because of it. Integration of systems is another challenge, as that often does not go smoothly.
A panel at the recent Bermuda Captive Conference discussed the challenges and opportunities with Reinsurer M&A.
One of the panelists, Patrick Tannock, head of XL Catlin’s Bermuda operations believes there will be three outcomes in the coming M&A activities:
- Some companies will do well by merging to get larger and benefit from larger scales of operations
- Some companies that feel they need to merge to get bigger, but will “fail horribly”
- The third scenario are those smaller companies that avoid the M&A fever and focus on particular niche markets they can dominate.
My opinion is that reinsurer M&A will continue, but the continued influx of alternative capital will dampen any significant efforts by the larger players to exert pricing discipline. There’s just too much capacity. What do you think? Leave a comment below.
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