“The reinsurance market is going through a consolidation phase,” wrote Swiss Re in 1998 (1), and here we go again, or so it seems. Since 2014, there have been four mergers and acquisitions (M&As) within the reinsurance space (2) that are pure consolidations rather than transactions by an acquirer from outside the sector. To date, we estimate that this consolidation wave has affected some USD 11 billion of net premium income and 5 percent of the global reinsurance market. However, that is short of the USD 16 billion and 13 percent, respectively, for the mid-1990s. There is nothing unusual about M&A. It is a cyclical phenomenon and very much in tune with the broader financial market environment.
Market Concentration Peaked 15 Years Ago
The market shares of the leading reinsurers have not changed materially since 2000. The obvious conclusion to draw from this is that the industry’s concentration has attained a stable and mature equilibrium that has endured for almost 15 years.
However, this equilibrium still enables new entrants and an influx of alternative capital. It is interesting to observe that among the new entrants in the top 20 ranked global reinsurance groups in 1994 there were just two Asian groups, and by 2014 there were six. For Bermuda it is a similar story, increasing from one to three.
Size Does Not Matter So Much As Financial Security
Arising out of the liability crisis in the 1980s and again after Hurricane Andrew in 1992, several leading reinsurers promoted a flight to quality hypothesis, both as a trigger for consolidation and to attract more business. Although this may have borne some success, it fizzled out in the early 2000s with reserving shortfalls and falling stock markets and then died with the financial crisis. It also did not prevent several, eventually short lived, new entrants from joining the market during this period.
More recently, the new concept coming from the leading reinsurers is tiering, as the top ranking two, three, four or five attempt to impress insurers with their “superior” credentials and justify preferential terms of trade. The real questions that insurers need answered concern the reinsurer’s financial strength, quality of assets, capital structure and its administration, risk appetite and risk management. As we cross the midpoint of the credit cycle these questions assume even more relevance. A bigger balance sheet does not equate to higher financial security or even address these other issues.
The chart below shows the top 20 reinsurers’ financial strength ratings have been in long-term decline since the mid-1990s despite their significant increase in scale over the same period. It is also noticeable that the ratings of the top five reinsurer groups have been converging with the other top reinsurer groupings.
Other Considerations Arising Out of M&A
While M&A may assist insurers in reducing the size of their reinsurance panel, including through larger line sizes, it can also materially increase their exposure to the new group. Potentially, this can create difficulties for insurers with large exposure or concentration limits to a single entity or group. In any case, we would anticipate that concentration risk will grow in importance for insurers under the Solvency II regime.
Other matters for insurers to consider include the newly merged entity’s legal structure, any post-merger restructuring and potential closure of non-core operations and changes to treatment of historic or latent liabilities. All of these can be very complex issues to grapple with and create significant uncertainty for stakeholders.
A Final Word on Purchasing Behavior
Mergers and acquisitions have a role and value to customers in most sectors, as long as competition and choice are preserved. The current spate of activity in reinsurance is not a new development and we believe that insurers can benefit from it over the long term as they have done through previous M&A cycles. However, it is vital that insurers - in collaboration with their advisers - continue to scrutinize their reinsurance relationships prudently and fully understand the implications of a reinsurer’s M&A activity for their business.
1. Sigma, 9/1998, The global reinsurance market in the midst of consolidation.
2. Both target and acquirer have significant reinsurance activities.