Adapt or face extinction – but don’t copy Berkshire Hathaway

With profits likely to remain depressed for at least another year, only reinsurers strong enough to adapt or evolve will survive, rating agency Standard & Poor’s (S&P) has warned in a report.

In the report, S&P also cautions against reinsurers simply emulating the Berkshire Hathaway business model.

So far, 2015 is shaping up as the year of mergers across many industries, the report, entitled Reinsurance Shark Tank—Only The Strong Will Survive, said.

The global reinsurance sector is no exception and has jumped on the mergers and acquisitions (M&A) bandwagon as management teams and their respective boards of directors place renewed attention on growth and responding to cedants' changing demands for greater scale.

Global reinsurers have seen the future, and it requires greater scale and diversification for them to remain relevant, the report suggested.

But it also warns against simply trying to emulate the once unique business model of Berkshire Hathaway, which treats reinsurance premium as a ‘float’, which it can invest for very high returns.

Taoufik Gharib, S&P credit analyst, said: “We expect reinsurance M&A momentum to continue for the rest of 2015 and into 2016 as the remaining small and midsize reinsurers race to find consolidation partners.”

Investors have shown more interest in emulating the Berkshire Hathaway model, but the success of this strategy remains to be seen, the report said.

The report concluded: “It is unlikely in the next 12 to 24 months that we will see profitability return to the strong levels of the past five years, that pricing will improve enough to turn the market across the board, or that competition will subside. In the meantime, for reinsurers, there seems to be a Darwinian concept at work, as only those strong enough to adapt or evolve will survive.”