Never one to hold-back when interviewed, XL Group CEO Mike McGavick has again said what many re/insurers fear, that as traditional and alternative reinsurance capital increasingly work side-by-side we should prepare for “a remarkable set of changes in the industry.”
Interviewed by the Wall Street Journal here, XL’s CEO discussed the recent wave of mergers and acquisitions in the reinsurance industry with a particular focus on Bermuda. Of course McGavick’s own firm is in the process of an acquisition of Catlin Group right now, making his comments on the future of the market particularly relevant.
McGavick said that he feels we’re still at the beginning of the consolidation story and to expect more to come. Hinting that Bermuda is among the most likely places for firms to seek out M&A transactions right now, he said that the airport on the island was a particularly good place to pick up M&A gossip.
While it might be tempting for some to camp out at Bermuda’s L.F. Wade airport in the hope of grabbing some inside tips on what M&A deals to expect next, we’re much more interested in McGavick’s thoughts on the future of the insurance and reinsurance industry.
McGavick said that traditional reinsurers are going to have to “bring more resources to bear” if they are to defend and grow their positions in the competitive market environment. Clients want to deal with firms with a global reach, he also explained.
Looking forward, McGavick hinted at a blurring of the lines between traditional and alternative reinsurance capital.
“To me, it’s going to be more and more common for there to be a mix of traditional reinsurers and non-traditional capital suppliers coming together in different forms,” he told the WSJ. “I think you’ll see a remarkable set of changes in the industry over the next decade.”
McGavick’s comments resonate strongly with thinking here at Artemis, where we’ve been writing about the potential for the separation between traditional and alternative capital in reinsurance to become less distinct, as the traditional players look to leverage lower-cost sources of capital.
The capital markets and its institutional investors remain the largest and most liquid source of capital available to re/insurers, perhaps the most suitable for taking on peak catastrophe perils particularly, and with investors now having a taste and appetite for insurance risk assets we can expect them to continue to participate.
Whether that participation in the future is alongside traditional reinsurers, as McGavick seems to be suggesting, or wielded by ever-larger specialist insurance-linked securities (ILS) managers, or even in some cases direct as we see today with a number of the largest pension funds, remains to be seen.
A number of things are certain.
We are seeing consolidation in reinsurance but we are also seeing changing business models as companies embrace new capital sources. As alternative reinsurance capital becomes indistinguishable to traditional reinsurance capacity the rate of change is set to increase. This structural change is resulting in lower margins, a big factor driving the urge to merge, and the end-result does look set to be a deeper reinsurance convergence.
Change is coming, in fact it started long-ago, but now the rate of change is accelerating as more mobile, lower-cost, efficient sources of capital are increasingly seeking access to insurance risk returns. The growth of ILS and alternative capital has already been remarkable. How capital changes the reinsurance market over the next ten years may make the last few look fairly ordinary.