Reinsurance Mergers, ILS Opportunity

Chris Westfall
Chris Westfall

The announcement yesterday that Partner Re was purchasing Paris Re in a $2 billion stock transaction is the latest merger announcement in the property/casualty reinsurance industry.

It is also the most current sign that consolidation among reinsurers is slowly diminishing capacity in an already weakened P/C reinsurance industry.

But for many industry participants, the question remains whether the slow draining of available capital will eventually push direct insurers to seek alternative solutions such as insurance linked securities.

“Where there is not capacity, it creates opportunity,” says John Nigh, managing principal of Mergers, Acquisitions and Restructuring for Towers Perrin’s insurance consulting practice.

Merger activity among P/C reinsurers has picked up over the past several weeks. Yesterday Partner Re announced that it would purchase Paris Re from its private equity owners in a stock deal that gives investors .30 shares of Partner stock for every share of Paris Re.

Separately, over the past month, two reinsurers — Flagstone Reinsurance and Validus Holdings — have been in a battle to acquire Bermuda-based IPC Holdings.

The consolidation of an already spare P/C reinsurance market means direct insurers will have less choice — and sometimes no choice — when looking to offload risks they sell to customers, says Nigh.

“In general, anytime you lose a reinsurer it’s not a good thing for directs,” Nigh says.

The lack of available reinsurance has not yet peaked into a capacity crunch but prices continue to rise and terms are tightening, according to a report by Guy Carpenter.

The report added that catastrophe prices for the U.S. have risen 15 percent during the July renewal season and that capacity was “sufficient without being abundant.”

Capital markets solutions will become a more viable alternative if the march toward reinsurance consolidation continues, Nigh says. “Consolidation does eventually create less capacity and as a result you will likely see more activity in the securities market.”

Reinsurance M&A will continue to pick up pace, Nigh argues, as the market attempts to cut costs during the global recession. “These deals are driven by scale and infrastructure, with companies looking to cut costs in IT support, human resources and financial reporting.”

He adds that although a bigger reinsurer has the capital to absorb a catastrophic loss, size is not always a positive attribute.

“Size does act as a buffer, but sometimes the bigger, they are the harder they fall,” Nigh says.
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