Reinsurance M&A creates opportunities, but is bigger actually better?

The potential market gap left by the surge of merger and acquisition (M&A) activity in the global reinsurance sector presents opportunities for start-ups in Bermuda and other risk transfer domiciles, but some industry experts have questioned if bigger is actually better.

Insurance and reinsurance software specialists Xuber, recently conducted and published an Executive Bermuda Roundtable titled ‘Removing the Constraints to Growth,’ discussing the glut of M&A activity in the re/insurance sector and what this means for the expanding, mature Bermuda market.

12 experts from across the insurance, reinsurance and insurance-linked securities (ILS) space, including legal experts, industry software developers/providers, insurance and reinsurance executives, took part in Xuber’s roundtable.

As the larger, more capital-rich re/insurers continue to offset the negative impacts of a softening reinsurance market, loaded with competition and expanding sources of traditional and alternative reinsurance capital, via M&A deals, smaller firms can benefit from potential gaps in existing and emerging business lines in the sector.

Furthermore, notes Mike Doyle, Senior Vice President (SVP) at reinsurer Ariel Re, “it’s a great opportunity for some of the smaller players and other carriers that are not involved in M&A activity because there’s a dislocation – teams that are not happy with M&A, teams that will be let go, and a distraction by carriers dealing with M&A activities and not primarily focused on day to day.”

This is an interesting angle to take on the current re/insurance market M&A trend, as much of the noise surrounding the topic discusses the benefits of the newly, or soon-to-be formed reinsurer of increased size and scale.

However, as the roundtable highlights, for the smaller firms that choose to stay out of the M&A “dance,” there’s a strong opportunity to capitalise on new business lines and displaced teams of people, a viable route for expanding scale and increasing market relevance in a testing re/insurance sector environment.

Bermuda-based reinsurance company Hamilton Re’s Chief Underwriting Officer (CUO), Claude Lefebvre feels that M&A activity is simply part of an industry cycle that typically takes place during a soft, or softening market, something that has been happening to the global reinsurance space for some time now.

But despite this, re/insurance market experts that took part in the roundtable claim that the recent spat of M&A activity has led some to ask the question if big is actually better.

“I’m not sure being a company with $10 billion of capital necessarily provides access to much more business than being a $5 billion sized company, but in a merger situation it’s not just about scale – it’s also about creating efficiencies and widening the scope of your resources and capabilities,” said Robert Johnston, President of reinsurer Aon Benfield, the reinsurance division of Aon plc.

Where experts from the roundtable struggle it seems, is when M&A occurs between like for like companies, as opposed to the obvious advantages gained from an M&A deal that provides access to a new book of business, for example.

Do like for like deals really make sense for the shareholder? That, notes Brad Adderley, Partner at Appleby, is something the industry will have to wait and see, adding; “The question is how many M&A deals actually increase shareholder value? I believe you’ll find the number is really small.”

Roundtable participant Chris Garrod, Partner at re/insurance law firm Conyers Dill & Pearman, also shared some doubt regarding the value of the current M&A trend; “Sometimes the potential challenges that these deals face can far outweigh the benefits.”

So clearly there’s some fair scepticism surrounding the recent host of M&A deals in the international re/insurance markets, with experts questioning the true value of some deals and raising the argument that it could be more reactionary than perhaps necessary, and some even going as far as to attribute the recent M&A activity to the new type of investor.

One such person is Brenton Slade, Chief Operating Officer (COO) at Horseshoe Group, who said the following when referring to the new types of investors in reinsurance companies, rather than insurance-linked securities (ILS) or index-based products.

“Passive index investors are the fastest growing source of capital. They don’t get involved and don’t understand reinsurance. As long as you are a certain size, you fit somewhere in the index and they have to buy you to that level. Investors used to want to manage performance.

“It’s completely changed now – they are increasingly passive and don’t have the same demands on performance or meeting certain return or risk profiles. It’s completely changed the way that reinsurers manage their business.”

So the challenges presented by M&A deals, particularly when considering the proposed ‘merger(s) of equals’ types of transactions are clear. As is the opportunities this presents to startups in the sector, something Bermuda could stand to benefit from as it maintains its status as one of the world’s leading insurance, reinsurance and ILS domiciles.

This point was highlighted by several of the experts that partook in Xuber’s roundtable, but was summed up perhaps most succinctly by Slade of Horseshoe Group, he said: “We see a lot of things going on behind the scenes. It’s not the same situation as we saw in 2005 and 2007 where Bermuda was the reinsurance equivalent of the ‘Klondike gold rush’ – where there were a lot of new people coming to the island and it was unsustainable.

“We’re getting back to the new normal, which is a more moderate level of growth, but behind the scenes there is so much innovation going on and a lot of new risks coming to the market.”