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Moody’s: Deteriorating environment for global reinsurers to lead to more M&A

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Moody’s expects there to be an increase in the number of mergers and acquisitions in the global reinsurance industry. This is because the operating environment of the reinsurance industry is becoming increasingly difficult, despite many attempts to minimise risk such as retrocessional coverage (reinsurance of a reinsurers business). In particular reinsurance rates are falling because of competition and insurers preferring to return money to their investors (take a larger risk in essence). More details in the announcement from Moody’s below, as well as a link to some stories about mergers between reinsurers and Citigroup selling their prime reinsurance unit.

Announcement:

Moody’s: Deteriorating environment for global reinsurers to lead to more M&A

Global Credit Research – 31 Mar 2015

New York, March 31, 2015 — The operating environment for the global reinsurance industry continues to deteriorate, which will lead to a rise in mergers and acquisitions, according to the latest edition of “Reinsurance Monitor” from Moody’s Investors Service. The quarterly newsletter features articles covering developments in the reinsurance sector.

Only half the reinsurers in Moody’s reinsurance cohort reported an improvement in profitability in 2014, despite fewer cat losses than in 2013. Besides the low level of insured natural catastrophes in 2014, sector earnings also benefitted from the US dollar’s strengthening.

In addition, insurers’ peak zone catastrophe risk exposures as a percentage of equity capital were generally flat to down. Reinsurers have been working to minimize risk by terminating or limiting participation on treaties with low expected returns, as well as using retrocessional coverage, largely from alternative capital providers, to bring down their risk exposures on a net basis.

Furthermore, given the ongoing decline in sector returns since 2006 and the limited prospects for improving underwriting margins, they have also been using a variety of measures in an attempt to bolster returns, among them, returning capital through common dividends and share buybacks, growing their primary insurance and non-cat lines, and shifting risk to cheaper alternative markets.

Nevertheless, the operating environment for the reinsurers continues to deteriorate, as property catastrophe reinsurance pricing (historically, the sector’s most profitable line) continues to decline owing to the ready availability of lower-cost alternative capital; demand for reinsurance decreases as primary companies retain more risk; reinsurance panels continue to shrink; ceding commissions on quota-share treaties rise; and interest rates remain persistently low.

The speed of the deterioration is tilting reinsurers’ “buy versus build” decision toward M&A because they don’t have time to build new platforms from scratch. Hence, Moody’s believes that reinsurers will continue to consolidate in 2015. Although consolidation, which carries risks of its own, won’t be enough to solve these issues, it will allow firms to expand scale and diversification and provide more opportunities to improve profitability by eliminating redundant costs.

Indeed, the last few months have seen a number of high-profile transactions already announced or closed: RenaissanceRe’s acquisition of Platinum Underwriters, announced in November 2014 and closed in March 2015; XL Group’s acquisition of Catlin Group Limited, announced in January 2015; and the merger of PartnerRe Ltd. and AXIS Capital Holdings, announced in January 2015.

This is available here:

https://www.moodys.com/research/Moodys-Deteriorating-environment-for-global-reinsurers-to-lead-to-more–PR_322086?WT.mc_id=AM~WWFob29fRmluYW5jZTQyX1NCX1JhdGluZyBOZXdzX0FsbF9Fbmc%3D~20150331_PR_322086

Related links:

http://www.reuters.com/article/2015/02/19/swissre-results-idUSL5N0VT0HC20150219

http://www.bloomberg.com/news/videos/2015-04-01/citigroup-preparing-to-sell-prime-reinsurance-unit

http://seekingalpha.com/article/3061056-reinsurance-m-and-a-generally-positive-but-wont-solve-issues-moodys

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