Posts Tagged ‘Capital Markets’
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.”
Guy Carpenter’s estimate of dedicated reinsurance sector capital as of July 1, 2015 was again produced through our work with A.M. Best. Our estimate is not a simple aggregation of the capital of all companies that write reinsurance since some capital is allocated to the insurance business or other outside interests. In fact, we have seen increased evidence that some companies are shifting capital toward insurance lines and away from reinsurance lines based on the current rate environment. A.M. Best and Guy Carpenter have estimated the amount of capital dedicated to writing reinsurance by reviewing A.M. Best’s proprietary capital model (BCAR) results as well as line of business allocations. Our current estimate of total capital dedicated to reinsurance is approximately USD 400 billion of which the convergence capital, including catastrophe bonds, industry loss warranties (ILWs), collateralized reinsurance and sidecars is USD 66 billion.
GC Securities* Report Shows Healthy Catastrophe Bond Activity Supported by Record Issuance of Private Bonds
GC Securities, a division of MMC Securities Corp., a U.S. registered broker-dealer and member FINRA/NFA/SIPC, today released a briefing and analysis of catastrophe bond activity for the second quarter of 2015, which shows healthy activity across the market and primary issuance levels recorded as the fourth highest second quarter on record.