13 November 2013ILS

New capital will drive M&A and innovation

The influx of convergence capital, which will top $100 billion over the next five years according to Bryon Ehrhart, CEO of Aon Benfield Americas, will drive M&A and a push to source new risks for a growing pool of traditional and alternative capital.

That was one of the key points to emerge from PwC and Standard & Poor's panel discussion on reinsurance developments at their eighth annual Bermuda Re/insurance Conference. Kevin Kelley, CEO of Ironshore said that the days of ROE's above 15 percent are long gone, with expectations for publicly listed companies sitting around 10 percent for 2014-2015, he said. This will in turn lead to “meaningful consolidation”, said Ehrhart as investors look to re/insurers to pep up their ROEs through acquisition and/or innovation.

Kean Driscoll, CEO of Validus Re said that such pressure will inevitably lead to a pursuit of scale, as larger players are able to offer larger line sizes and have the potential to be more innovative in their product offering. Ehrhart added that for traditional players to be credible, their balance sheet nowadays needs to be north of $2 billion. He said that in the case of collateralised players it was much easier to be a smaller entity, but that with the leveraged and rated model $2 billion is the inflection point.

Kelley was rather more circumspect in his assessment of necessary size however, arguing that “it is all about execution”. He contended that size is not an issue, as long as the company is highly focused. He also cautioned that consolidation—when it does occur—needs to be good for both sides. A one-sided deal is not a recipe for success, he said.

Kelley added that the industry must take the opportunity created by the rise of convergence capital to pursue innovation and take on more publicly-held risk. Citing conventional terrorism as a case in point, he said that the industry could and should do more to wrestle such risks from governments. Kelley explained that the industry “could extend meaningful capacity” that could sit alongside government backstops for CBNR and cyber terrorism risks.