M&A uptick to boost demand
Hannover Re expects the recent uptick in M&A activity to be followed by further deals, but also to result in higher reinsurance demand, Michael Pickel, Hannover Re executive board member, told Monte Carlo Today.
Post-merger, insurers will often buy more reinsurance for a couple of years while they refine their reinsurance structure and seek to avoid mismatches or losses in the aftermath of the process, Pickel said.
Recent large transactions include AXA acquiring XL Group for $15.3 billion, American International Group buying Bermuda-based Validus Holdings for $5.56 billion and Markel Corporation acquiring Nephila Holdings.
“M&A deals usually lead to higher reinsurance premium,” Pickel said. “When you do large deals, you don’t want to have a bad surprise on the risk side while both entities are being combined.”
He expects more M&A transactions going forward, driven by smaller companies that find it difficult to grow in a challenging rate environment. They are also under pressure to boost returns and meet increasing costs of capital, he explained. In addition, potential acquirers currently can find attractive financing conditions, he added.
With the January renewals approaching, companies involved in M&A must assess the combined risk and design a new reinsurance programme quickly, Pickel said.
While traditional reinsurers are expected to benefit from higher demand for coverage from the increase in M&A transactions, some of the risk may also be transformed through insurance-linked securities (ILS) as the market offers plenty of capacity, he said.
Pickel believes that ILS has a bright future. “Every big pension fund would like to diversify its risk and is looking at all asset classes. If pension funds allocate 2 or 3 percent of their invested assets into ILS then this creates a sustainable flow of capacity,” he said.
The ILS market can deliver capacity for short-tail risks and potentially some medium-tail risk business, Pickel noted.
Hannover Re participates in the market via an ILS fund. The reinsurer also helps brokers to bring reinsurance structures to the capital markets and offers collateralised reinsurance as a fronting company for ILS markets. In addition, Hannover Re uses ILS as a retrocession tool.
“ILS is not a threat to the traditional reinsurance model,” Pickel said. “There are many new perils that will need insurance cover driven for example by economic growth and higher real estate prices.”
