‘Conditions are tough and getting tougher’
Expect more merger activity in a tough insurance industry that is getting tougher, top executives told conference delegates in Hamilton yesterday.
A wave of consolidation has swept through Bermuda's flagship industry this year, highlighted by the RenaissanceRe-Platinum, XL-Catlin and Endurance-Montpelier combinations and the takeovers of PartnerRe and Ironshore by foreign investment firms.
The chief executive officers of Arch Capital, Ironshore and Third Point Re made it clear yesterday that the mergers and acquisitions were likely to continue, in their panel discussion at the EY Global (Re)insurance Outlook in association with The Insurance Insider at the Hamilton Princess.
“Conditions in the industry are tough and getting tougher,” John Berger, CEO of Third Point Re, said. “There is fear and hopelessness out there in some boardrooms.
“M&A is a way out and some boards just give up and I expect that to continue. It's not easy for the industry because it means fewer jobs.”
Kevin Kelley, CEO of Ironshore, said his company's reasons for selling up to Chinese investment firm Fosun International, were primarily to do with capital structure. The company was formed on the back of private-equity capital, but this was effectively temporary capital, he said.
“We had built the company to a significant scale and we were ready to make the next move to a more permanent capital base. I think a lot of the M&A we have seen is unique to the participants,” Mr Kelley added.
Dinos Iordanou, CEO of Arch, said: “The fact that capital is flowing in is an indication that we are in a healthy industry.” Capital would always flow to where the returns were, he added.
The game had changed during his 40 years in the industry, Mr Iordanou said, particularly since the formation of Ace and XL in Bermuda in the mid-1980s.
Before that time, there was an expectation that a heavy loss would be followed by recapitalisation. Now new capital would go into the strongest or new companies, rather than to rebuild a hard-hit company.
“So don't sin, because the punishment is death,” Mr Iordanou added.
The desire for scale was a factor in consolidation, Mr Iordanou said.
“The ticket to the dancefloor was about $1 billion in 2001,” he said. “Today a $1 billion company would have a difficult time to be on the top tier.
“The new normal is $3 billion to $5 billion and it keeps going up. Some of the M&A might have been done because of the need for scale.”
Third Point Re's Mr Berger said: “We do find ourselves up against many bigger competitors, but where we win is that we're more nimble and can act quicker.”
Ironshore focuses only on insurance and Mr Kelley said: “Scale is very relevant in reinsurance but less so in insurance. To compete in tomorrow's world, we have to be nimble, creative and efficient.”
Efficiency remained a problem for insurance industry, he added. “The expense ratio average in our industry must be about 33 per cent to 35 per cent,” Mr Kelley said. “One of our challenges is to get the ratio down to where it needs to be and where our customers expect it to be. You can't have a business with an expense ratio over 30 and still get competitive returns.”
Innovation was needed to address that, he said. Ironshore worked with Genpac, a company that deals with its back-office operations and which has helped the insurer knock three points off its expense ratio, Mr Kelley said.
Arch's Mr Iordanou spoke of the opportunities presented by advances in technology and particularly in data analytics.
“How we utilise technology will differentiate one company from another,” he said. “I tell my people that we are a manufacturer of decisions. We have to find ways of eliminating defects from our decision-making process.
“That's why we are hiring specialists in predictive analytics. We have five or six of those people, that's all they do.”
The panel was moderated by EY partner Nadine Mirchandani.