Reinsurance M&A should be about more than just scale: Baden-Baden

by Artemis on October 19, 2015

Persistent pressures in the global reinsurance market signal a continuation of the merger and acquisition (M&A) trend currently sweeping through the industry, leading Stephen Catlin, of XL Catlin, to urge those involved in M&A activity to do so for more than just scale.

In recent times, benign loss activity, ample capacity and heightened competition has relentlessly, negatively impacted the international reinsurance market landscape, creating a challenging operating environment for players large and small, driving a continuation of rate declines.

Something that Nick Frankland, Chief Executive Officer (CEO) of EMEA operations at Guy Carpenter feels won’t be ending anytime soon.

The result of this has seen numerous market players seek to embark on some form of M&A activity as they look to offset the challenging market environment, gain scale, and ensure they remain relevant to their clients and the market.

While the flood of consolidation so far in 2015 has led some industry experts and analysts to note a return of the ‘mega deal,’ reinsurance industry executives meeting in Baden-Baden this week highlighted the importance of embarking on an M&A transaction for more than just a hunt for scale.

Stephen Catlin, of the recently formed XL Catlin, a £2.79 billion merger that significantly contributed to the current wave of consolidation when it came to light back in January 2015, stressed the importance of there being a strategic reason to undertake M&A activity other than just increased scale supporting the decision.

According to Catlin numerous factors are influencing and driving the current spate of M&A activity in the reinsurance sector, and it’s not simply a case of “one-size-fits-all,” further highlighting his belief that it’s imperative M&A is undertaken for the right reasons, and again not just for scale.

Furthermore, when discussing the decisions and processes that resulted in the creation of the XL Catlin brand, Catlin noted that for those firms that perhaps feel consolidation is inevitable, owing to a declining market share and a fear of losing market relevance, to name just a couple of possible M&A drivers, it’s best to be on the front foot and grab the initiative.

“If you believe consolidation is going to happen, why wouldn’t you get on the front foot, be proactive and choose your partner,” advised Catlin.

It’s an interesting and valid point, highlighting the increasing need for reinsurance entities large and small, well diversified and niche, to be alert to the changing market dynamics, adopt a proactive approach or risk being left behind, resulting in failure to adapt and remain relevant to the market and its participants.

While for some reinsurers consolidation is likely inevitable if they wish to remain in the reinsurance business, John Doucette, Chief Underwriting Officer (CUO) of Everest Re, stressed that M&A isn’t the only reaction to the evolving market landscape.

“As the reinsurance world restructures with new capital vehicles and higher velocity of capital, M&A is just one strategic mechanism for evolving in the new market reality. Despite the promised benefits, the costs and risks of M&A indicate that it is not the panacea,” warned Doucette.

Adding; “Global reinsurers are well-positioned to build off their internal strengths with scale, diversification, and expense and capital efficiencies. Supplemented with innovative products and capital structures, relevance to clients and brokers can be maintained and enhanced for the winners in the new world order.”

Doucette’s admission and warning that reinsurance M&A is certainly no panacea, is one that’s been expressed by reinsurance industry ratings agencies, analysts and experts previously, with the value of the sector’s M&A trend remaining unclear, but the expectation that it will continue to gain traction throughout the remainder of the year and into 2016.

What’s more, consolidation in the sector isn’t something new, highlighted Managing Director of Mapfre Re, Eduardo Perez de Lima, as a wave of M&A activity in the late 90s resulted in dozens of deals with varied outcomes.

“Motives underlying consolidation are varied and surely differ for each transaction, including continued softening market, lack of critical mass or diversification and unsustainable business models,” said Perez de Lima.

Continuing to stress that the winners of the current wave of consolidation “will be those reinsurers that provide client-oriented, sustainable, consistent and professional services and capacities, combined with well-designed business models.

“Some will be consolidators, but often they will be companies that have already built a strong franchise, skills, platforms and client relationships who will benefit from this trend, without having to enter into challenging and costly M&A processes.”

The message is clear then, companies must be strategic and mindful of the real reasons they are embarking on consolidation and adopt an approach and strategy that delivers more than just increased scale post transaction. But if the need to merge or acquire is inevitable then it’s best to be proactive and stay ahead of the pack.

To conclude, Chris Klein, Head of EMEA Strategy at Guy Carpenter, said; “We have heard that growth is not simply about swallowing up each other. Amid all of the excitement of the announcements, the proof is in the execution and success ultimately depends on continuing to provide customers what they need and want at a value-for-money price within a stable relationship.”

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