Mergers and acquisitions (M&A) activity is to continue at heightened levels through 2019 as re/insurers try to find opportunities for growth against a backdrop of adverse market conditions, according to analysts at JMP Securities.
JMP explained that consolidation would offer an attractive route to growth for many companies due to ongoing top-line and expense pressures and limited areas of organic growth.
Analysts also pointed to disappointing pricing trends at the recent January renewals, which were flat to slightly down despite a second consecutive year of elevated catastrophe losses.
This was in part due to the large contingent of very competitive and loss-free Europe business that renewed in January, JMP said, with rates expected to climb at the Japan renewals in April and the mid-year renewals in the U.S.
However, rates are likely to increase more gradually than they have done in the past following heavy catastrophe loss years, and book values will be compounded further by declining interest rates, expanding credit spreads, and weak equity markets, JMP cautioned.
With the property cat pricing cycle unlikely to harden significantly, analysts claimed that traditional re/insurers need to find a way to remain competitive in an increasingly commoditised market.
One way to do this is to better match risk with capital, JMP noted, which can be achieved through further use of alternative capital and insurance-linked securities (ILS).
JMP Securities has previously advocated for the ‘hybrid’ reinsurer model embraced by the likes of RenaissanceRe and Validus, but now believes that it is a requirement to remain competitive in the market.
“If a reinsurer does not have an alternative/ILS capital operation of reasonable scale, in our view, it should reconsider its place in the market,” analysts stated.
In light of this conclusion, JMP Securities expects to see further ILS manager acquisitions over 2019, similar to 2018 deals such as Markel’s acquisition of Nephila and AIG’s acquisition of Validus (through which it gained access to AlphaCat).
