The latest renewals report from Willis Re highlights that relentless rate reductions, low investment returns and the continued influx of alternative capital have offered no respite for reinsurers at the January 1, 2015 renewal season. Against this backdrop a reshaping of the global reinsurance industry is now starting in earnest where the only sustainable action for reinsurers is to change their business models, portfolio mixes and to strive for scale.
Mergers and Acquisitions
M&A activity is now reality and the categorizing of reinsurers into distinct tiers by buyers has gained wider traction, putting real pressure on smaller reinsurers and mono line catastrophe writers. With only a limited supply of attractive target companies, consolidators looking for scale and diversification are moving as company valuations become more reasonable for both parties.
“In the current environment many reinsurers recognise they can no longer hope for salvation through major market losses or increasing interest rates,” said Peter Hearn, Chairman of Willis Re. “Their only sustainable course of action is to change their business models, portfolio mixes and to strive for scale. The new mantra is diversification. Whether this is by class or geography—preferably both—reinsurers are being actively rewarded by investors and buyers who see diversification as key to sustainability, along with size.”
But not all reinsurers are accepting wider terms and conditions in addition to reduced rates, and a number of buyers have given firm order prices above the best market terms to maintain their relationships with key partners.
Some reinsurers are also actively scaling back their portfolios and going into 2015 with reduced budgets—particularly within the natural catastrophe sphere—helping to resist overly aggressive pricing and terms and conditions.
The anticipated influx of hedge fund-backed reinsurers also appears to have abated. However, the this may be more closely related to rating agency hurdles than to current market conditions.
“The continued lack of demand and oversupply of capital can only keep driving pricing down,” said Wills Re CEO John Cavanagh. “Unlike other financial markets, the reinsurance market lacks inherent depth, with no structured secondary trading market to help absorb the excess capacity. As a sector, we need to create depth.”