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Guy Carpenter: soft market to drive more M&A

Only a considerable natural disaster or a market disruption is likely to stem the proliferation of mergers and acquisitions now impacting the insurance and reinsurance sector.

That is the conclusion of a mid-year report from Guy Carpenter & Co, which lists $55 billion of M&A activity in the past 12 months, with the largest being the pending $28.3 billion acquisition of Chubb Corp by Ace Ltd.

Guy Carpenter has analysed data from the past 20 years to show a correlation between softening market conditions and increased M&A activity.

This correlation in the US specialty market was disrupted in 2009 by the financial crisis and has since remained muted.

“Reinsurance market M&A activity is more difficult to interpret given the smaller number of transactions. However, it is notable that since 2006, M&A numbers have trended upwards as premium rates have decreased, and this shift would be more exaggerated when considered on the basis of deal value,” the report noted.

The rapid flow of alternative third-party capital into the reinsurance market, through collateralised reinsurance, sidecars and bonds, has driven down prices and accelerated the onset of mergers, according to Guy Carpenter.

The risk and reinsurance intermediary services company noted that other investors, previously unconnected with insurance, have now entered the M&A market.

“Exor's offer to acquire Partner Re is an example of a knowledgeable investor identifying reinsurance market returns as an attractive opportunity relative to the yields available elsewhere, despite current market conditions,” the report stated.

Guy Carpenter is of the view that, barring any market upheaval or major insured loss catastrophe, M&A activity will continue and increase.

“With the dynamics in place, absent a market catalyst or a macro-environment event, we can reasonably expect continued proliferation of M&A activity,” the firm wrote in its Mid-Year (Re) Insurance Report.

Looking ahead at challenges and opportunities for insurers and reinsurers, Guy Carpenter said that three areas that warrant particular attention are the regulatory and ratings environment, emerging risks and public-private partnerships.

In the US, there are moves under way to converge accounting standards along with new regulatory requirements. The report noted: “Insurers will need to more tightly link their business plans with both capital and earnings adequacy assessments from a risk-adjusted perspective, to enhance their AM Best ratings while complying with new regulatory requirements.”

And in Europe insurers are facing a more complex regulatory environment, including the implementation of Solvency II at the start of 2016.

A number of territories in Asia also have increasing solvency requirements, with China developing an approach similar to Solvency II.

Cyber risk, and its potential to cause damage and disruption on a large scale, is seen as a major concern.

“As the global economy becomes increasingly dependent on e-commerce and cloud computing, the susceptibility to cyber risk increase exponentially,” the report stated.

“The current size of the global cyber network/privacy insurance market, from a premium perspective, is approximately $2 billion and is expected to grow to $5 billion over the next five years.”

Market trend: Ace Ltd's pending acquisition of Chubb Corp is the largest insurance sector M&A deal announced during the past year. Guy Carpenter believes the proliferation of M&A activity is set to continue

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Published August 07, 2015 at 9:00 am (Updated August 06, 2015 at 8:22 pm)

Guy Carpenter: soft market to drive more M&A

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