October 15th, 2013

Capital Stewardship Option: M&A - Grow/Diversify by Product Line

Posted at 1:00 AM ET

As carriers explore M&A opportunities to grow in the current environment, there is strong interest from potential buyers looking for bolt-on opportunities rather than transformational transactions. Although this demand has not to-date triggered a significant increase in M&A transactions, the ingredients for more activity are now in place.

Grow/Diversify by Product Line (e.g. Specialty Insurance)

Specialty insurance is one of the few market sectors where underwriting and claims management expertise and client/broker relationships are still the predominant differentiators for a successful business, posing a significant barrier for convergence market participants. The specialty pricing environment has recently improved (see Figure F-9), though there are signs that this pricing momentum may begin to diminish with increased competition and competitively priced reinsurance.

f9-us-line-rates-ol-new

The market’s response to the new competitive threat from Berkshire Hathaway’s excess and surplus (E&S)vehicle has yet to be seen, but it would not be unreasonable to assume that it will have a dampening effect on the pricing outlook. This may in turn lead to further consolidation/acquisition of small to mid-sized E&S participants, dependent on E&S business being a major source of revenue.

The successful penetration of convergence market participants is evidence that some reinsurance structures are more efficient in collateralized form, backed by capital from a lower cost provider. One of the major challenges these relatively new reinsurance market entrants face is their ability to secure a regular flow of risk to assume on behalf of their investors.

Recent evidence has demonstrated that some of the larger participants have closed funds as they have been unable to deploy available capital within their investment guidelines and return targets. To date, ILS funds’ growth strategies have focused on the distribution side, with several funds entering partnerships with other asset management firms to expand the potential sources of new capital. This demand/supply paradigm may prompt a shift in strategy with some convergence participants likely to consider a direct investment or a strategic partnership with a reinsurance company to enhance the source of accessible risks and reduce their dependency on brokers.

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*Securities or investments, as applicable, are offered in the United States through GC Securities, a division of MMC Securities Corp., a US registered broker-dealer and member FINRA/NFA/SIPC. Main Office: 1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. Securities or investments, as applicable, are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd. (MMCSEL), which is authorized and regulated by the Financial Conduct Authority, main office 25 The North Colonnade, Canary Wharf, London E14 5HS. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC. MMC Securities Corp., MMC Securities (Europe) Ltd. and Guy Carpenter & Company, LLC are affiliates owned by Marsh & McLennan Companies. This communication is not intended as an offer to sell or a solicitation of any offer to buy any security, financial instrument, reinsurance or insurance product. **GC Analytics is a registered mark with the U.S. Patent and Trademark Office.

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