Re/insurance M&A trend could prove costly to Lloyd’s: Fitch Ratings

In light of the current merger and acquisition (M&A) trend sweeping through the re/insurance sector, larger, specialist re/insurance entities could be an emerging risk to Lloyd’s of London’s business share, according to Fitch Ratings.

As insurers and reinsurers across the globe seek to hedge some of the pressures of an increasingly over-capitalised, competitive and tough market, a wave of M&A deals have taken place, with more expected to follow.

Financial ratings agency Fitch Ratings, has advised that new, larger firms that are born from the merging of smaller companies, which are seeking greater scale, improved diversification and lower operating costs, could have more “flexibility in choosing whether they want to underwrite through their own brand or use the Lloyd’s platform,” explains Fitch.

Fitch advises that after overheads and acquisition costs are taken into account, operating through Lloyd’s is usually more expensive than through a traditional insurance model. Therefore larger organisations that spawn from a merge might find it more appealing to underwrite directly through their own brand.

Lloyd’s was made aware of the possibility that it’s position “as the undisputed global hub for commercial insurance is under threat” via a report from the London Market Group and Boston Consulting last year. The same report that stated more than half of future growth within the re/insurance industry is now coming from emerging markets.

The London Market Group and Boston Consulting survey concluded that the Lloyd’s market was at “tipping point,” and that “London’s global leadership will become increasingly challenged,” amidst losing shares of global reinsurance operations.

And now it seems that all the market consolidation taking place in and around Lloyd’s could also be a cause of concern for the market’s financial hierarchy and world leading position.

According to Fitch, one way Lloyd’s can mitigate any negative impact from current market trends, and in particular M&A, is to maintain and increase its focus on innovative products, a key driver in capturing a share of new and emerging markets.

In light of this, Lloyd’s Chairman John Nelson recently discussed a vigorous expansion programme in an article with the Telegraph, which will see the market considerably grow its presence in China and India, with a strategic presence also desired in Brazil, Chile, Mexico and other mainstream business hubs.

The “mini-Lloyd’s” hubs that Nelson envisions are part of the Lloyd’s Vision 2025 scheme, which has a focus on entering and building a relationship in new, emerging markets.

Should Lloyd’s successfully implement its extensive emerging markets growth plans, then with or without mergers the platform should benefit from being able to write innovative and emerging business, in greater regions of the globe.

This in turn will make the platform more attractive to clients, brokers and cedents, ensuring they have less reason to access a market absent Lloyd’s.

Fitch does stress the fact that syndicates which choose to continue operating through the Lloyd’s brand post-merger, and those that wish to operate through the market for the first time after merging with a current Lloyd’s syndicate, can reap the benefits.

Including, “the use of the Lloyd’s brand, ratings, access to global licenses and an efficient capital structure. Lloyd’s could be used to access jurisdictions or lines of business that were previously unavailable to the entity pre-merger, increasing business written through the platform.

“Having a larger and stronger capital provider backing a syndicate can be an increased attraction to brokers and cedents alike,” notes Fitch.

Clearly, the Lloyd’s brand carries some weight, and for certain insurers and reinsurers the extra operating costs and somewhat limited access to certain jurisdictions is offset by the platforms strong underwriting expertise and branding benefits.

But Fitch stresses that Lloyd’s must ensure focus is on “progress in market modernisation and improving the efficiency of doing business at Lloyd’s,” or risk missing out on future business opportunities, and ultimately losing further market share.

Concluding that; “Limited growth opportunities in developed markets have already led a number of insurers with a Lloyd’s presence to enter emerging markets independent of Lloyd’s.”

The most recent M&A transaction, and one that concerns a Lloyd’s member, is Fairfax Financial’s $1.88 billion takeover of Brit plc, a specialty Lloyd’s re/insurer, which came hot on the heels of XL Group’s £2.97 billion acquirement of Bermudian firm Catlin, as covered at the time by Artemis.