Reinsurers risk having partners chosen for them

Reinsurers who are reluctant to accept the potential need to find a suitable partner in order to compete may be faced with having their partner chosen for them.

This is according to rating agency AM Best, in its latest report on merger and acquisition (M&A) activity in the global reinsurance market.

“In the words of Stephen Catlin, chief executive officer of Catlin since the announced transaction with XL Group plc on January 9, 2015: “...if the industry is consolidating, wouldn’t you rather choose the partner with which you want to work rather than have your partner chosen for you...?”

“These words may one day become prophetic for companies that are at the moment reluctant to accept the potential need to find a suitable partner in order to compete in the current market,” said the rating agency.

AM Best explained that it expects M&A to continue in 2015, particularly as competition intensifies and returns continue to decline.

“Additionally, market conditions are expected to remain competitive and challenging, as primary companies retain more business, and/or seek higher ceding commissions or multiyear contracts for sharing their profitable business. Continued margin compression is also anticipated as third-party capital sources seek a larger piece of a smaller pie,” said AM Best.

According to the rating agency, reinsurers need to be able to manoeuvre through market cycles by having the ability to move in and out of various business classes and geographies as market conditions dictate.

“Market players that accept this new stage of the cycle will have a first mover advantage for possible suitable alternatives that will allow for the development of more efficient, focused, and diversified companies,” said the rating agency.

It anticipates that companies with well-diversified businesses and a global reach will likely see the majority of the deals in the market. However, players with limited books of business or limited geographic reach may feel like they have to ride this pricing cycle down and hope they’ll be in a position to later ride it back up.

“For several years it was thought, particularly in Bermuda, that there were too many companies competing for the same business and that sentiment was probably true. However, as companies continued to thrive in strong market conditions and delivered attractive returns to investors no one seemed to care that the market was overcrowded,” explained AM Best.

“At the current stage of this cycle, however, companies, customers, and investors alike are all aware that something has to give as the challenges facing the reinsurance market are expected to stay in place for the foreseeable future. Add to that the abundant amount of capacity from third party capital providers and today the market is flooded with record breaking capital fighting for diminishing premiums.”