Low interest rates, alternative capital driving industry consolidation in insurance: A.M. Best

An influx of alternative capital into the reinsurance market, low interest rates and a desire for geographic expansion are among the factors driving mergers and acquisitions in the insurance industry, A.M. Best Company Inc. suggested in a recent report.

“A.M. Best expects industry consolidation to remain at the forefront of the management agenda as companies attempt to drive cost efficiencies, diversify both geographically and by product and increase market share,” the Oldwick, N.J. firm stated July 17 in a special report. “The low interest rate environment is also conducive to deal making, enabling cheaper borrowing to finance deals.”

A.M. Best cited several recent examples of primary insurance acquisition deals, including the July 1 announcement by ACE Ltd. and The Chubb Corp. that their boards approved an agreement under which ACE would buy Chubb for about US$28.3 billion. Other examples cited by A.M. Best included XL Group Plc’s acquisition of Catlin Group Ltd. – completed May 1 – and Toronto-based Fairfax financial Holdings Ltd.’s recent announcement that it completed its cash tender offer to shareholders of Brit Plc.

Primary insurers are “well-capitalised and retaining more risk on their balance sheets,” A.M. Best stated, adding industry consolidation can “result in reduced expenses and cost efficiencies.”

In the reinsurance sector, A.M. Best cited several examples, including the acquisition of Platinum Underwriters Holdings Ltd. by RenaissanceRe Holdings Ltd., completed March 2. Both firms are based in Pembroke, Bermuda.

Another was the proposed merger between Bermuda reinsurers Axis Capital Holdings Ltd. and PartnerRe Ltd. Shareholders of both firms are scheduled to vote on the proposal Aug. 7. EXOR S.p.A., a Turin-Italy-based investment firm, announced in April its own proposal to acquire PartnerRe and is urging PartnerRe shareholders to vote against a merger with Axis.

“In the reinsurance sector, a significant factor has been that rates and terms and conditions remain under pressure as a result of the recent period of benign loss activity and the influx of alternative capital,” A.M. Best reported. “As competition is intensifying, operating margins are being squeezed.”

A.M. Best also suggested firms like Tokio Marine Holdings Inc. are “continuing to look toward geographic expansion.”

Tokyo-based Tokio Marine announced in June it has agreed to acquire HCC Insurance Holdings Inc. for about US$7.5 billion.

Houston-based HCC owns Houston Casualty Company and eight other U.S. carriers, as well as Lloyd’s Syndicate 4141. Its coverages include marine and energy, property treaty, property (direct and facultative), directors’ and officers’ liability, professional indemnity, casualty, surety, agriculture, aviation and sports and entertainment.

Though there are numerous advantages to industry consolidation, Best noted takeover deals “could also expose the acquirer to unforeseen or under-determined new risks, such as legacy issues.”