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M&A likely to continue on a smaller scale

Market view: Robert DeRose, vice-president of AM Best, speaks during a panel discussion on reinsurance rate and risks at the AM Best conference in the Hamilton Princess (Photograph by Blaire Simmons)

Mergers and acquisitions in the reinsurance industry will continue, an expert from ratings agency AM Best predicted yesterday.

But John Andre, group vice-president, said that any new mergers would likely be on a smaller scale than the past few years, although jobs might still go.

Mr Andre was speaking at a one-day conference in Bermuda. He said: “The big ones are harder — they take so long to absorb, but we will continue to see merger and acquisitions of the small and medium type.

“It might not be a straightforward merger, it might be a company acquiring a team of analysts from another company and hopefully taking their business with them.”

Mr Andre warned that jobs could still go as the industry evolved in the face of a changing marketplace.

He said: “There could be a fall in jobs as a result. They look for synergies and often that can mean a reduction of staff, absolutely.”

Mr Andre spoke as US-based AM Best held a seminar at the Hamilton Princess to discuss changes to the firm’s credit rating methodology, designed to improve transparency and take advantage of new benchmarking and analytical tools.

Mr Andre said the reinsurance industry continued to face a number of challenges.

He explained: “It’s many, it’s overabundance of capital, it’s competition, it’s investment returns. These are the ones that come most to mind.”

But he said: “Bermuda is certainly very solid. It’s a wonderful platform down here, with all these insurance and reinsurance specialists in such a small space with very good management.”

He added that AM Best, which rates 90 companies on the island, both in the international business sector and three local operators.

Mr Andre said that the growth of alternative capital, like insurance-linked securities had changed the landscape for traditional insurers and reinsurers.

“The industry is maintaining underwriting discipline, managing its capital and evolving.

“The market levels aren’t like they used to be. Companies have to be very innovative in order to compete.”

Mr Andre said that variations in interest rates were a crucial factor for the sector.

“If we see an improvement in interest rates, that will go a long way.”

And he predicted: “The business will continue to evolve — it’s not what it was 20 years ago, it’s a heck of a lot different.”

Earlier in a panel discussion, AM Best vice-president Robert DeRose said the agency had maintained a negative outlook for the reinsurance sector for two years as “we are seeing returns under pressure.”

He added that returns had gone from double digits to “high single digits” in the last few years, while investment yields had also dropped, leading to “lacklustre” earnings.

And Mr DeRose said: “Soft market conditions over a period of years generally ends up translating into adverse reserve development and we’re just wondering when that’s going to occur.

“We don’t see the negative outlook going stable any time soon.”

Susan Molineux, a senior financial analyst with AM Best and a former employee of the Bermuda Monetary Authority, said new players were also interested in entering the reinsurance business.

Mr DeRose added the buy-up of Partner Re by Italian investment giants Exor was a prime example.

He said: “Investment returns are suppressed around the world and, as I said, reinsurance has generally been profitable — I think the fact it has been profitable has been attracting new investors to the space.”