While the alternative capital entering reinsurance markets has spurred transactions in accordance with the anti-correlation theory, other investors that have entered the market via acquisition of businesses have certainly blurred the theory’s parameter of the required level of underwriting margin.
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Disruptive Forces to M&A Activity: Alternative Capital Directly Supporting Increased Market Competition
The flow of alternative capital into the reinsurance markets has been sustained and substantial. The growth of this capital, coming from a number of sources, including fund managers and sidecars, has been a staggering 22 percent - compounding since 2008 and accelerating to 34 percent during the period 2012 to 2014. There was a consequent rate softening, mostly felt within the reinsurance landscape, particularly in short tail lines. The softening then trickled down into the specialty insurance classes.
The reality is that many external forces continually disrupt the impact on merger & acquisition (M&A) activity of the insurance pricing cycle. This is especially true in recent years as insurance markets are influenced by wider financial conditions, new investors, globalization and the benefits of healthy profits despite a prolonged period of rate softening. These disruptive forces provide both positive and negative contributions to the M&A-conducive market conditions resulting from the current stage in the insurance cycle.
Andrew Beecroft, Managing Director, GC Securities*
New capital inflows, excess capacity and benign catastrophe loss activity have contributed to falling (re)insurance prices and a challenging environment for specialty (re)insurers. These combined factors have been the rationale for predictions of a wave of market consolidation, which appear to have become a reality during 2015 as a series of rumors and announcements grabbed the headlines.
Challenging market conditions due to abundant capacity, the ongoing influx of new capital and limited loss experience, continue to put pressure on the reinsurance sector, while recent M&A activity is adding a new dynamic to the mix. This is according to the panel of speakers at the eighth annual press briefing held at the Reinsurance Rendez-Vous 2015 in Monte Carlo, by Guy Carpenter & Company, LLC, a leading global risk and reinsurance specialist and a wholly owned subsidiary of Marsh & McLennan Companies.
Assessing the impact of the continuing influx of capital into the reinsurance sector, David Priebe, Vice Chairman, Guy Carpenter, commented on ILS pricing levels. He said: “We believe current price levels for ILS could be a ‘golden compromise’ in which protection buyers perceive good value for fixed-price multi-year cover and investors continue to broaden and diversify their portfolio of holdings. With costs of issue falling and time-to-market shortening, this equilibrium could provide a substantial boost to the market that the record issuance of early 2015 portends.”
Alex Moczarski, President and Chief Executive Officer, Guy Carpenter & Company, and Chairman, Marsh & McLennan Companies International, introduces the Guy Carpenter press briefing at the Monte Carlo Rendez-Vous in this GC Capital Ideas videocast.
Focusing on the Asian market, James Nash, CEO of Asia-Pacific Operations, Guy Carpenter, highlighted the increasing flow of capital from the region into Europe, Lloyd’s and the US. He said: “Asia is perceived as a growth opportunity and is attracting capital from mature markets, but it is actually Asian capital seeking opportunities overseas which is the headline story this year. In 2015, Asia-Pacific has been a net exporter of insurance and reinsurance capital through M&A, with Japan and China leading the charge into Europe, Lloyd’s and the US. In the year to September 2015, outbound deals totaled USD20 billion compared with inbound deals of only USD849 million.” Looking ahead, he added: “We expect the M&A trend to continue as insurers, reinsurers and funds in the region pursue growth and diversification by going West, but we also anticipate a larger number of intra-region deals and also capital from the West coming East.”