The CFO of the world’s largest reinsurance company, Munich Re, told a German newspaper this weekend that consolidation through mergers & acquisitions may be ahead for smaller reinsurers pressured by pricing and other factors.
Munich Re CFO Joerg Schneider told Boersen Zeitung that consolidation was more likely for smaller reinsurers given the pressure they are facing from competition, reduced reinsurance rates, the continued low-interest rate environment and increasingly stringent regulation.
It has become increasingly difficult for smaller reinsurance firms to maintain their premium income given the ever-increasing competition for those premiums from larger, globally diverse reinsurers like Munich Re who are awash with capital and seeking expansion.
At the same time the smaller reinsurers are facing increasing pressure from alternative reinsurance capital, supplied by institutional investors such as pension funds, money managers and fixed income investors, which is utilising its lower-cost to take a growing piece of the traditional reinsurance business for itself.
The smaller to mid-tier reinsurers, as well as the property catastrophe focused reinsurers, are the ones which are increasingly being squeezed between the large global reinsurers and alternative capital. Smaller reinsurers do not have the scale to be expansive, like a Munich Re, or the ability to compete in most cases with lower-cost, institutional investor sourced reinsurance capacity.
So these smaller reinsurers are the ones which receive the attention from analysts, journalists and anyone else who feels like speculating about where consolidation may be seen in the reinsurance market.
How consolidation takes place, if or when it does, is hard to forecast. Will it be the large globally diverse reinsurers that take opportunities to snap up smaller players as a way to grow more rapidly? Will it be the mid-tier reinsurers seeking to step up into the larger category of reinsurers? Will it be smaller reinsurers merging with other smaller players, trying to create mid-tier firms or specialists? Or might it even be more institutional money, from private equity investors or perhaps hedge fund managers, who look to buy smaller reinsurers, operate them at a lower cost-of-capital and leverage the premiums as a more permanent source of capital?
The consolidation, when it comes, could take many shapes. The fact that consolidation is ahead for some in the reinsurance market seems almost guaranteed now, with the rate environment still softening and competition growing ever more fierce. The most likely outcome is that we’ll see a mixture of these scenarios, of mergers, acquisitions and reinsurers being bought and changed into new, leaner, investment focused players with innovative business models.
Schneider said in his interview that he does not expect to see larger reinsurers merge as they could essentially lose business by doing so. He said that he expects the current pricing environment will be a temporary development in reinsurance, adding that pricing will likely increase again in the medium-term.
For the smaller reinsurers that come under pressure that may be too later. We could begin to see some analysts voicing concerns about small reinsurance firms perhaps around the third-quarter results. By that time we will have seen a year-on-year Florida and U.S. property catastrophe price drop and the impact of pricing pressure will have spread even more broadly towards most areas of the reinsurance market, at least where losses haven’t impacted the market.
At that stage of the year, with just a few months to go until the key January reinsurance renewals, we may see some negative sentiment emerging on smaller reinsurance players, at which point the M&A rumour mill may begin to rumble.