The high-profile merger during 2015 that resulted in the formation of XL Catlin appears to have had a positive impact on the firm’s reinsurance segment, creating new opportunities and impacting premiums by less than 1%, according to Greg Hendrick, CEO of Reinsurance at XL Catlin.
Almost one-year since the XL Catlin deal completed, the firm recently reported its first-quarter 2016 results, revealing a decline in operating income to $103.4 million when compared to a year earlier, driven by integration costs ($55 million) and higher catastrophe losses ($52.8 million).
The wave of merger and acquisition (M&A) activity witnessed throughout last year, driven by a need among insurers and reinsurers to remain relevant, increase scale and market share, led industry analysts and observers to highlight potential challenges.
With Standard & Poor’s (S&P) going so far as to suggest the majority of re/insurance was actually negative, as perceived synergies are rarely achieved.
While the establishment of XL Catlin is clearly still impacting results for the firm, highlighted by Q1 integration costs of $55 million, and with the re/insurance market landscape remaining challenging, the firm’s reinsurance segment performed well in the quarter.
During XL Catlin’s Q1 2016 earnings call Hendrick revealed that the firm continues to see “very little lost business as a result of the transaction,” adding that the impact is less than 1% on reinsurance premiums.
“In fact, brokers and clients have been very supportive of XL Catlin Re and we’re seeing significant new business opportunities as we generated $240 million of new business during the first-quarter of 2016,” said Hendrick.
The re/insurers results show that driven by the combination with Catlin its reinsurance segment gross written premiums (GWP) increased by an impressive 124.7% from the previous year quarter.
Furthermore, the combination enabled the firm to access new peril regions, as the segment “wrote significant new business across all regions, in particular EMEA.”
Despite the increase in new business the non-renewed premiums of $150 million offset the $240 million gain, explains Hendrick, a move that also highlights disciplined underwriting from the group.
“Unacceptable pricing or terms and conditions” was instrumental in XL Catlin pulling back on some business and resisting the urge to underwrite for the sake of it, something that can be dangerous in a softening market.
“Despite difficult market conditions, our underwriting teams continue to do an excellent job retaining profitable business and finding new opportunities while maintaining underwriting discipline,” said Hendrick.
M&A activity is expected to feature again across the insurance, reinsurance and even insurance-linked securities (ILS) industry in 2016, as many of the same market challenges seen last year persist, and possibly intensify.
Insurers and reinsurers are adopting varied strategies and techniques to attempt to mitigate the impacts of the softening environment, and when losses start to normalise, reserve diminish further, and so on, there will undoubtedly be winners and losers.
M&A clearly has its challenges and the integration costs can be high, but as with XL Catlin and any deal, they will eventually cease and growth in underwriting and investment gains (or losses) will be the driver of performance.
But it’s important companies understand the risks that are stressed by ratings agency and industry analysts, that if unsuccessful M&A can leave companies in a worse position than before the deal.
For XL Catlin the expanded underwriting platform will also be benefiting its Bermuda-based ILS investment fund management unit New Ocean Capital Management.
New Ocean will be able to access a much broader range of risks through the merged XL Catlin. As well as being able to underwrite alongside the different units of the larger firm, the ILS investment manager can also benefit from the enhanced access to markets such as Lloyd’s of London as well.
That should help New Ocean and the other third-party reinsurance capital activities at XL Catlin to secure growth more easily, with any enhanced access to risk an attractive draw for institutional investors.
XL Catlin’s reinsurance segment growth and performance during Q1 shows that M&A can positively impact business lines, creating new opportunities and access to new, diversifying peril regions, ultimately adding value.
The value this adds to XL Catlin’s bottom-line and its shareholders, will also be extended over time to the third-party capital investors in New Ocean’s fund’s and also the third-party capital backed Lloyd’s special purpose syndicates that the company runs, as greater access to risk and relevance in the market will benefit all of the re/insurers backers.