Re/insurers likely to dive into M&A to escape adverse market conditions, survey suggests

The low interest rate environment will put pressure on investment returns for an extended period after the UK’s vote to leave the EU, which has also increased market volatility and may drive the UK economy into recession.

Meanwhile, the liability side of companies is being squeezed by soft rates. High levels of capacity, exacerbated by the alternative capital that has poured into the reinsurance market, has been made worse by the absence of any large losses in property/casualty in recent years.

The survey, which was taken by 87 readers, revealed that 63 percent expect an increase in mergers and acquisitions activity as profits become increasingly pressurised.

One reader suggested that M&A will be the predominant solution until a catastrophe loss happens that is large enough to justify higher rates.

Large carriers are arguably better prepared to operate in the tough market conditions, and 30 percent of respondents believe that only the largest players will survive.

“It is very likely that we'll see some players out of this market. It will take some time, though, but unfortunately or fortunately it will happen,” one reader commented.

Another option for carriers to deal with the current adverse environment would be to scale back underwriting and 36 percent of respondents see this as a likely outcome. One respondent believes that as a result of re/insurers dropping business there will be upward pressure on prices going forward.

Others suggested that the current situation is likely to remain unchanged for some time. “Reinsurers are still making money - albeit at lower levels than previously.  Additionally, non-traditional capital sources continue to see insurance as a non-correlating asset. Until the capital dries up or there are some losses, the status quo will not change,” a reader wrote.

Another reader suggested that “nimble, niche, players will be able to prosper while entities with corporate inertia will fail.”

As a reaction to the low interest rate environment and in order to protect investment returns, re/insurers are exploring changes to their investment mixes but opportunities are limited, according to an S&P Global Ratings report.

In an analysis of about 40 rated insurance groups in Western Europe, the ratings agency says that insurers do look at returns, but at the same time they also weigh the risks. The sector is somehow constrained by the need to match the profile of their liabilities, the insurance policies and products that they sell. In addition, the choices to invest are limited by regulation, and in Europe, Solvency II, which requires that insurers back up investments into riskier asset classes with more capital, the report notes.

The pressure on profitability is worrying large carriers like Swiss Re. In its  second quarter results presentation group chief executive officer Christian Mumenthaler suggested that the sector will not be able to cope with much more pressure on rates. “We are hitting a point where we are no longer creating value for shareholders,” he warned.

Mumenthaler expects reinsurers to reduce capacity as the business ceases to be economically viable, allowing prices to stabilize and even resulting in some recovery.

The natural catastrophe losses in the second quarter are adding to a number of other drivers leading to pricing stabilization, he says.

For one, less attractive margins will serve as a deterrent for the industry to deploy capital. In addition, the industry faces “less positive reserve developments” in the future. And the low interest rate environment, which is weighing on investment returns adds to pressures which will, over time, lead to companies writing less business and to scaling back. If a company’s results don’t match investors’ expectations, "the boardroom will start reacting and you will see some levelling out and then some rate increases," he predicts.

Swiss Re has already scaled back in the US natural catastrophe market and will scale back further if necessary, Mumenthaler said.