April 8, 2015

M & A- the long view

Last week’s announcement that Endurance will be buying Montpelier was the fifth significant reinsurance deal in as many months. Assured Research, an insurance focused research firm, has analysed the data from the last 15 years of M&A activity in the P&C industry. They argue that lack of growth is the driving force behind the recent glut of deals and further consolidation is inevitable. Here are their findings:

The flood of alternative capital has upended the industry’s economics and if companies don’t lower their cost of capital and/or become more efficient they will have a hard time competing in a world with continued pressure on premium rates. Consequently, size and scale have become more important.

Mergers and acquisitions in the property casualty industry
Data from SNL Financial show that in the last 15 years there has been an average of 50 deals per annum; from a high of 71 in 2010 to a low of 24 in 2004. The total value of the deals during this time was $128 billion.

M&A is an answer to the slowing growth/falling returns dilemma
Every industry eventually transitions from growth to maturity and the property-casualty industry is no exception. Until the mid-1980s property and casualty insurance was a growth business as new coverages were being developed for casualty risks and this, among other reasons, propelled premium growth in excess of 9% annually from the 1950s through the 1980s. But then maturity set in and premium growth slowed both in nominal and real terms and the annual rate of premium growth since the mid 1980s has only been around 3.5%.

Also, slowing growth will eventually lead to falling returns because as long as the ROE is above the rate of business growth, premium leverage (premium over capital) will decline. And unless profit margins increase to offset (which they usually don’t) the level of profitability has to fall (note that: ROE equals profit margins times premium leverage.)

Read the full report and view the statistical models at Insurance Linked by clicking here

Source: Insurance Linked

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