M&A unlikely to reduce competition in reinsurance: Xuber survey

While the ongoing wave of mergers and acquisitions (M&A) in the reinsurance sector will reduce the number of companies active in the market, it is unlikely to lead to a reduction in competition, as non-traditional capital sources abound.

The second wave of results from a global reinsurance survey undertaken by Xuber (details on the first wave of results can be found here), the insurance software arm of Xchanging, discuss the current M&A activity and the challenges that companies will face both in integrating successfully and also whether the post-M&A result will actually help them.

The M&A has been stimulated by reinsurance market conditions, of falling rates, lower investment returns, growing competition from third-party capital, ILS and new market entrants over the last year. Faced with the reality that they can risk being left behind, a number of companies have taken the leap to enter into M&A.

Responses to the survey show that reinsurance executives feel that the M&A activity, while positive for some companies that get it right and achieve greater scale, diversity or access to growth, will not ease the currently competitive reinsurance market conditions.

There had been a belief in some quarters that M&A in reinsurance would reduce the competition, as a result of fewer large players being in the market. However with the entry of alternative and non-traditional sources of capital continuing and competition from insurance-linked securities (ILS) set to increase as well, the reinsurance market is not set to get any less competitive as a result.

Chris Baker, Executive Director of Xuber, explained some of the challenges that the survey respondents felt M&A participants face; “Bigger does not always mean better, and the mismanagement of the cultural integration between merged companies can ultimately undermine the potential value created. Fusing diverse company cultures and qualities can deliver immense value as both companies bring something unique and different to the table. Mergers and acquisitions create anxiety amongst employees, and both companies are keen not to lose a culture that works for them and is meaningful.”

Respondents were asked how much they expected the reinsurance industry to contract, in terms of the number of large international reinsurers that would be left in two years time.

In response to a question asking how many reinsurers would exist that could write $500 million or more of gross premiums in 2017, there was a mixed response with 40% expecting between 40 and 50 companies, 23% saying 20-30, 20% said 30-40, 15% more than 50 and just 2% expect the industry to shrink down to just 10-20 large global reinsurance firms.

While the expectation is that the number of globally active reinsurers will shrink as a result of M&A, at the same time respondents do not expect the level of competition in reinsurance will decrease. An overwhelming 80% of survey respondents did not believe that fewer reinsurers equals less competition, while just 18% did believe the market would be less competitive.

The abundance of ILS and capital markets backed capacity, as well as an increasing number of new reinsurance start-ups backed by hedge funds, private equity or other non-traditional direct capital providers, assures that competition is set to remain high.

Xuber’s survey results warn of the difficulties associated with completing an M&A transaction effectively, with cultural integration the top concern, followed by systems integration and the potential for distraction from business as usual.

This third response, the risks of being distracted or held back by the M&A process, is actually a key one for many firms. While reinsurers going through M&A are focused on generating the efficiencies they promised to shareholders and managing the cultural fit, other players in reinsurance that are not involved in a transaction, can carry on regardless and make progress on initiatives targeting growth or innovation.

So there is a risk of being left behind while focused on the difficult task of M&A, and then emerging out of the other side to a reinsurance market that is just as competitive, perhaps even more so, than it was before the process started.

Some choice comments from some of the respondents to Xuber’s survey:

“In the first instance, it may appear that the market will become less competitive, but as firms seek to maximise M&A activity, the industry will become increasingly competitive.”

“There will be no place for smaller general and global reinsurers.”

“Due to (among other things) the absence of price and terms/conditions regulation, reinsurance remains one of the most competitive segments of the global economy.”

“Those which haven’t been affected by any mergers will become increasingly competitive and those who have been impacted by the mergers will compete more fiercely with each other to remain competitive.”

“There are now so many non- traditional capital sources above and beyond reinsurance that competition has never been greater.”

That last quote from a respondent is key. The number of competitors is actually growing  and many of them are operating non-traditional business models, leveraging non-traditional capital, with a goal to be more efficient and ultimately cost-effective.

M&A will not stop the emergence of new business models, either coming from within the market and seeking to disrupt the reinsurance food-chain, or coming from outside such as capital market entrants seeking to benefit from the returns and low-correlation of reinsurance business.

M&A will also not reduce the amount of capital in the reinsurance market, which is really driving competition, or capital that is interested in getting into the reinsurance market. The only thing that will reduce that is a run of serious loss events, or perhaps a major financial meltdown.

M&A is certainly no panacea for reinsurers that have been feeling under pressure. If executed well, with efficiency and cost-savings in mind, as well as expansion, diversity and growth, then it should propel reinsurers to the next level. If executed poorly, reinsurers could find themselves worse off and facing just as much, if not more, competition than when they started the process.

Also read our article on the first part of Xuber’s survey: Soft market, third-party capital top reinsurance survey concerns: Xuber.