More insurance mergers and casualties coming
The wave of mergers and acquisitions in the insurance and reinsurance sector will continue and there will be casualties.
That was a blunt assessment that emerged during an insurance and reinsurance review at the Bermuda Captive Conference.
One of last year’s big mergers was the $4.28 billion deal between XL with Catlin Group.
Patrick Tannock, head of XL Catlin’s Bermuda insurance operations, said the continuing M&A activity will broadly deliver three outcomes.
Some companies will do well by merging to enlarge themselves and benefit from bigger scales of economy and enhanced market presence, he said. But there will be a second category of companies that feel they also need to operate at a larger scale but “will fail horribly”.
The third outcome, according to Mr Tannock, will be small companies that remain in place and pick up smaller pieces of business or niche market share.
While the XL Catlin deal was a market-shaker in 2015, it paled by comparison to the $29.7 billion merger of Chubb and Ace Ltd, which was completed at the beginning of this year.
Judy Gonsalves, chief underwriting officer of Chubb Bermuda, was also on the panel, and agreed the three M&A outcomes suggested by Mr Tannock were a likely scenario.
She said many companies are seeking ways to use deploy excess capital, and one way was to buy or merge with another company.
“A lot of clients are looking for a partner in their programme,” she said.
“You need to grow scale and sometimes M&A is the only way to do that” because growing organically is usually too slow.
Ms Gonsalves and Mr Tannock were on a three-strong panel that discussed the Bermuda insurance and reinsurance market during a session at the three-day captive conference.
The third panellist, John Berger, chief executive officer of Third Point Reinsurance, said there will always be small, agile companies in the insurance and reinsurance market.
He expressed a strong belief that M&A will continue, and said a driving “synergy” was the lowering of costs, often achieved by reducing the number of employees.
“[M&A} is going to be very active in the future, but we are going to see some unlucky people stub their toe,” he warned.
Cyber-risk was a concern raised by one of the conference attendees. He asked how insurers and reinsurers are responding to captive clients seeking cyber-risk coverage.
Panel moderator Joe Rego, the CEO of Aon (Bermuda), replied: “We have seen development of significant capacity. It’s an evolving landscape. We are not there yet.”
Mr Tannock said the industry did a good job covering tangible risks, but was still grappling with intangible risks, such as cyber with its many complexities.
However, he said his company offers cyber-risk coverage and has done for some time. He acknowledged the industry might need to do a better job “getting out there and telling people” about what cyber-risk coverage is available.
Likewise, Ms Gonsalves said Chubb provided cyber-risk capacity. She said it was a complex and evolving business and noted that price levels could be a challenge.
“Pricing in this class of business is not attractive to a lot of clients — it might not be at a price that is economically attractive for some.”
Regarding the overall downward pressure on premium rates that has existed for a number of years, Ms Gonsalves said: “I’d love to say we have hit the floor, but I don’t think we are there yet.”
However, she said: “There’s far more to the risk transfer puzzle than price. I don’t think there is any room for complacency here. We must stay focused on underwriting discipline.”
Bermuda is known for providing reliable, long-term capacity and must hold on to that distinction and reputation, said Ms Gonsalves.
Meanwhile, Mr Tannock said alternative capital has smoothed some of the peaks and troughs from the market. He echoed the need for underwriting discipline, but also adaptability.
The panellists agreed that Bermuda is the world’s most effective and responsive insurance and reinsurance centre. Mr Tannock said the island had “made its own luck” by being proactive, embracing analytics and adapting. Noting the island’s reputation for innovation, he said: “Bermuda is the best market in town in terms of speed to market.”
Mr Berger described how Third Point Reinsurance had come to Bermuda 4½ years ago, at a time when XL had moved its corporate centre of gravity to Ireland [it is now in the process of redomiciling to Bermuda], while other big names, such as Allied World Insurance and Ace, had favoured Zurich.
“It was a dark day [for Bermuda]. It looked as though people were going away.”
Mr Berger said Third Point had looked at Dublin and Zurich, but “there was no comparison with Bermuda”.
He cited the high standing of the Bermuda Monetary Authority, the island’s proximity to the US market and its concentration of industry talent, as factors that swayed Third Point’s decision to make Bermuda its home.
He said the rest of the world has discovered insurance, reinsurance and risk appetite. He said the question now was how to put it together more efficiently.
“There’s going to be radical changes in the next four or five years,” said Mr Berger, and he predicted Bermuda would be an exciting place for young people entering the sphere of insurance and reinsurance.
The Bermuda Captive Conference at the Fairmont Southampton started on Monday and ends today.
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