M&A trend drives hybrid models

The recent new wave of consolidation has shown a further trend towards more companies operating so-called hybrid business models, whereby they write both insurance and reinsurance. Such a model can generate useful synergies, but it is also one of many factors driving consolidation, Torsten Jeworrek, member of Munich Re’s Board of Management, told Monte Carlo Today.

“Companies with hybrid underwriter models tend to focus more on either insurance or reinsurance. Quite often, profitability stems predominantly from the key focus area, and is not shared equally between the two business segments,” Jeworrek said.

“Insurance risk and market-cycle diversification can be improved if these hybrid underwriter models are established at the holding level of companies. Synergies in terms of technology and know-how transfer are also possible.”

A number of significant deals have already been announced this year, including AIG’s now-completed acquisition of Validus and AXA’s purchase of XL; more recently, Apollo has agreed to acquire Aspen and Markel is buying Nephila Capital.

But, Jeworrek stressed, there are much deeper forces at work driving M&A activity, which is occurring despite price levels remaining high.

“We are witnessing investments for an increasingly diverse set of reasons, from further diversification of business models to larger deals aiming for additional scale. At the same time, we also see companies re-focusing their businesses, divesting non-strategic assets or areas with larger loss situations,” Jeworrek said.

“Other drivers of transactions are global, political and economic changes such as reactions to the Brexit referendum and the US tax reform impacting on Bermudian markets, for example. Increasingly, M&A transactions are also taking place to gain access to technology know-how.

“I believe that mounting political and economic changes will continue to drive M&A, in line with further pressure towards consolidation and access to new technologies. I expect these M&A drivers to remain present in the coming years.

“In the reinsurance sector, consolidation is taking place among the smaller companies, so there will be stronger market players in the future.”

He added that, in line with that, transactions providing access to technology will remain on the list for many companies; he foresees further attempts at partnerships which would have been considered “unusual” just a few years ago.

“This is especially true for the Asian markets. Nevertheless, we believe that players who invested in new technologies early on and built up strong in-house capabilities at the same time will retain a competitive advantage, including with regard to identifying and integrating further technology partners,” he said.

In terms of the way he expects rates to move, Jeworrek stressed that he cannot gaze into a crystal ball with regard to what the next renewals will bring. But overall, price decreases across regions and lines of business have been halted, he said. In some markets—depending on loss amounts following last year’s hurricane events—price increases could be achieved, he added.

“A certain share of the hurricane losses from last year was covered by the alternative market. Neither in traditional markets nor from alternative capital did we perceive a shortage of capacity for these losses. Nevertheless, Munich Re is observing a widespread shift towards greater discipline in the market, which is positive.”

He said that, with respect to the casualty market, some market participants have had to strengthen their prior-year casualty reserves.

“In contrast to past reserve releases, which have offset rate reductions, we now observe more and more reserving concerns that could lead to original rate increases, benefiting all quota share business.

“The growing demand for adverse loss development covers also underlines the pressure in and willingness of the original market to protect future earnings. We are currently observing a flat market for loss-free casualty programmes and moderate rate increases for loss-affected accounts, very often accompanied by lower ceding commissions,” Jeworrek said.

He admitted that the ILS market remains robust and a big influence on rates—but only within specific lines of business.

“The alternative reinsurance sector, and the ILS market in particular, grew significantly in the first two quarters of 2018. The alternative market is an established asset class providing uncorrelated asset returns.

“The existence of this asset class is largely due to the availability of external models, and it is highly focused on US nat cat. For all other risks, traditional reinsurers’ capital costs are much more competitive. Most clients are looking for highly flexible covers as provided by the traditional players,” he said.

He stressed that perhaps a bigger challenge for insurers and reinsurers will be keeping pace with change, much of it driven by new technologies.

“There is no doubt that the insurance industry is changing dramatically, and that only those who embrace new challenges and understand that they have to innovate will stay relevant for their clients,” he said.

“Insurtechs are playing a role here. Nevertheless, I do not believe that insurance will experience a ‘big bang’ disruption. The change in the insurance industry will be brought about by the industry itself, which will incorporate all data and digital possibilities into its products and processes.”