W.R. Berkley CEO expects reinsurer consolidation, to tap alternative capital

by Artemis on April 24, 2014

High levels of competition in the global reinsurance market, with excess capital in the sector and alternative reinsurance capital a factor, will result in a lot of reinsurer consolidation, particularly among the ‘billion dollar club’, according to William R. Berkley.

Berkley, the CEO of commercial lines property casualty insurer and reinsurer W.R. Berkley Corporation discussed the likelihood that reinsurance firms with around a billion-dollars of capital and which are not specialised in any way are likely to find themselves targets of mergers or acquisitions.

The reason for this is the increasingly high levels of competition in the reinsurance market, partly created by the influx of alternative capital from institutional investors such as pension funds but also due to the low levels of losses suffered in the traditional market.

The reinsurance sector remains awash with cash and Berkley believes that consolidation is inevitable, particularly for these reinsurers around the billion-dollar mark but also on the insurance company and broker side of the market. Berkley also believes that managing alternative capital will be an avenue his firm will pursue and it has been exploring the opportunities presented by the market since the trend first emerged.

The comments were made during the insurers first-quarter results conference call yesterday.

President and COO of the insurer, W. Robert Berkley Jr, commented on the competitive nature of the reinsurance market today; “The reinsurance market remains painfully competitive. The combination of an ongoing change and the approach that ceding companies are taking, combined with the increasing participation from non-traditional capacity coming into the space, is putting a tremendous amount of pressure on the market.”

This is a trend which is growing in magnitude for reinsurers, according to W. R. Berkley, with the pressures from the high levels of competition and capital set to spread and broaden their reach.

W. Robert Berkley Jr continued; “Traditional market participants are grappling with this new reality and trying to figure out what their model will be going forward. While this intense competition has to date been more focused on the U.S. reinsurance market, the western European reinsurance market as well as global accounts, it would seem as though this new phenomenon within the reinsurance space is spreading to other regions.”

CEO William R Berkley believes that the increasing pressure from the trend could bring his firm opportunities, either as an acquirer of companies or in a restructuring of its reinsurance program, both of which would not be ruled out.

“At this point in time we’re always hearing about opportunities but the opportunities have to create value for our shareholders. We think there will be a lot of consolidation, especially of what I call the billion-dollar club. The people in the reinsurance business who have $1 billion, plus or minus, of capital, and who don’t fit in the marketplace.” William R Berkley said.

Conversely Berkley said that his firm has so much mobile capital that it is in a position to step in and take opportunities. However he noted that creating value for shareholders is his key goal and that some other reinsurers have shareholding director interests as a higher priority which can make them slow to respond to an attractive M&A environment.

Berkley continued; “We think that unless you’re a specialized reinsurer in that billion-dollar club, a lot of those people are going to disappear. In addition to that, it’s going to be hard for mid-sized players in that same-sized category, to continue to generate value unless they have a real special niche. So I think there will be substantial consolidation on both the insurance company and broker side.”

William R Berkley feels that at this point the competitive and price pressures being felt by his firm in re/insurance are to do with the highly capitalised nature of the sector, not directly due to the influence of alternative reinsurance capital vehicles.

He explained; “You’ve got somewhat of a ripple or a domino effect where you’re seeing some of this alternative capital coming in and then trying to play the property or property-related game. That in turn is driving some of the traditional players to feel the pressure on the property side and to be looking to participate in a broader manner in the casualty space.”

Berkley said that due to the size and scale of his firm, its balance sheet, the service it provides and its employees intellectual capital that it has been reasonably well insulated compared to others who are facing alternative capital head-on.

The discussion moved on to where W.R. Berkley may see opportunities for itself to leverage alternative capital within its business. With the firm having a casualty re/insurance focus the topic of recent hybrid reinsurer start-up Watford Re came up and William R Berkley agreed that it is a good strategy.

In response to an analyst’s question Berkley responded; “You’re talking about Watford and Arch and we think it’s a good opportunity. We think that it’s a thoughtful approach, but it’s different than how we would do it.”

But Berkley does believe that his firm will look to manage alternative capital but he is in no hurry to do so. He commented; “We think there are opportunities to manage alternative capital, but it’s got to be very long-term alternative capital from our point of view. We view this business a little differently than most people and we think it’s a long-term business.”

Berkley said that he would be looking for investors with a long-term investment horizon, not hedge fund type investors. He also said that he doesn’t believe that everyone who has got into reinsurance as a third-party investor fully appreciates the potential long-tail on reinsurance business, the duration that claims can develop for and the fact that it is an industry based on long-term risks.

That said, William R Berkley said that he has been looking at the alternative reinsurance capital trend for many years, so far without launching an initiative focused on it.

“It’s an interesting thing, it’s going to continue and it’s going to represent opportunities. We’ve been looking at it for an extended period of time, I hate to tell you, in fact since Max Re, which was the first one down the line we’ve been looking at it. So that tells you how slow we are.”

Berkley said that there is good reason for taking a slow and steady approach to alternative capital; “We’re slow because we think the risks are hidden and unforeseen and every time we think we figured it out we find out there’s something we haven’t thought about. But I would be surprised if we didn’t find some way which we thought appropriate.”

So that sounds like W.R. Berkley Corporation might find itself making use of alternative capital in its business at some point in the future. The slow and steady approach taken by such a large firm is perhaps another sign that this trend is still developing and has some way to go before it reaches any kind of peak. Perhaps once W.R. Berkley has launched an alternative capital initiative we’ll be in a better position to see how it has affected the fortunes of the ‘billion dollar club’ of reinsurers as well.

Also read:

Reinsurance downside risks grow, June renewals will test: Moody’s.

Consolidation ahead for smaller reinsurers: Munich Re CFO.

Some alternative capital will get badly burned: W.R. Berkley CEO.

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