15 April 2014 Insurance

Endurance-Aspen move could signal M&A boom

The unsolicited offer made yesterday (Monday) by Endurance Speciality for Aspen Insurance could well represent just the start of a period of intense mergers & acquisitions (M&A) activity for the reinsurance industry that some commentators have been forecasting for some time.

In a lengthy and detailed proposal, Endurance indicated that the deal would create a new global leader in the industry and a stronger, more profitable company. He also said that he expects the combined company to generate synergies exceeding $100 million annually, resulting in significant ROE and EPS accretion in 2015.

“The specialised businesses of Endurance and Aspen, such as Endurance's market-leading agriculture insurance business and Aspen's Lloyd's operations, are highly complementary, and together we will create a company with increased scale, an attractive diversified platform across products and geographies, and greater market presence and relevance,” Charman said.

But many commentators have been predicting more M&A for some time, driven by a number of fundamental changes in the reinsurance markets. One of these is the unprecedented levels of new capacity entering the markets, creating intense competition in some areas and driving down rates. As more traditional reinsurance seek diversification into new lines of business, acquisition will become a natural strategic move for some.

Secondly, driven partly by regulatory requirements and resulting changes to the way they manage their capital and partly by the growing availability of fully collateralised coverage, some of the world’s larger buyers of reinsurance have been rationalising their approach.

Many are choosing to work with a smaller number of highly-rated reinsurers, which can work with them on a global basis and complement rather than compete for the growing percentage of business they are placing into the insurance-linked securities (ILS) markets or other alternative markets that offer fully collateralised coverage.

But this shift has the potential to leave many mid-tier reinsurers, which would have previously enjoyed small but lucrative parts of these programmes, high and dry. One solution is simply to pursue an M&A strategy to achieve high ratings and a bigger presence in the market.

This exact point was made this week by Joerg Schneider, the chief financial officer of Munich Re, in a widely reported interview with German newspaper Boersen Zeitung. He said that a period of consolidation may be ahead for smaller reinsurers pressured by pricing and other factors including the continued low-interest rate environment and increasingly stringent regulation.

He pointed out that smaller to mid-tier reinsurers, as well as property-catastrophe focused players, are increasingly being squeezed between the large global reinsurers and alternative capital.

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