With pressures facing the global reinsurance market persisting Deutsche Bank Securities has revealed that London Market reinsurers acknowledge the need for relevance, but that it isn’t all about the size of your balance sheet.
Following a London Market day, hosted by Deutsche Bank Securities (DB), the firm has released a research report, titled, “London Market, ‘Death by a thousand cuts,’” discussing the trends and views currently occupying the London market.
“While the companies all see ‘relevance’ as being key, they defined this more in terms of value-add to clients and the ability to write big lines than in terms of absolute size of balance sheet or premiums,” says the report.
With an abundance of alternative and traditional reinsurance capacity flooding an overly competitive market, worsened by a prolonged lack of large catastrophe losses, merger and acquisition (M&A) activity in the global re/insurance sector has flourished.
Most recently, Italian investment firm EXOR tabled a $6.4 billion bid for reinsurer PartnerRe, a company that was already part of a proposed merger with AXIS Capital Holdings.
Prior to this revelation Endurance Specialty Holdings announced plans to purchase Montpelier Re for $1.83 billion, just weeks after RenaissanceRe finalised the takeover of Platinum Underwriters, and that’s just a few of the M&A deals that have occurred in the space over the last year or so.
As ample capacity creates cheaper reinsurance, enabling clients to shop around more freely than before, companies have turned to M&A as they look for cost-effective ways to navigate a tough environment.
But the DB report signals that while reinsurers in the London market seek relevance, this doesn’t necessarily refer to actual market capital, but relates to lasting client relationships and ultimately recommendation and trust.
“The necessity to work with brokers was also a strong theme: underwriters who engage with them are more likely to be treated favourably when it comes to signings (in contrast to those with a more adversarial approach),” explained DB.
A valid point, and one highlighted earlier this year by Lancashire Group’s Chief Underwriting Officer (CUO) Paul Gregory, who said; “Relevance and scale should not be confused,” continuing to add that in the reinsurance sector relevance is about building and maintaining relationships, and being a recommended market with brokers.
DB notes that during its London market visit management at Lancashire stressed that “their strong underwriting discipline and emphasis on nurturing broker relations,” helped to reduce any volatility in the business.
Market conditions aren’t predicted to turn anytime soon and DB’s study expresses doubt that any single large loss event will result in a “big swing” in the current cycle.
So with stress on rates predicted to remain for the foreseeable future and competition intense, reinsurers would be wise to focus on disciplined underwriting and efficient, innovative risk solutions.
On navigating the current trend, DB notes that firms share the view that now is a time for sensible, intelligent capital management.
“There was general agreement about the importance of smart reinsurance buying, and the reduction in volatility of earnings that results from this (which should imply lower cat budgets and/or reduced costs of equity),” the firm said.
Adding that while it views valuations in the space as progressively challenging; “We continue to view these as good quality franchises with active capital management approaches and decent likely total returns even in tough market conditions.”