Stephen Ross warns that M&A, not recapitalisation, can be expected
What a difference a year makes. The market turmoil of 2008 has subsided and the perception of ‘green shoots’ of recovery have replaced pessimistic predictions of capacity shortages.
The firming renewal rates of early 2009, a (so far) benign hurricane season and a mild bounce in investment returns should combine to produce strong results for the year and begin the process of rebuilding weakened balance sheets.
Capital continues to be a relatively scarce commodity for some reinsurers and new capital remains limited. The reinsurance market has shown that after market-changing events – such as September 11 and the hurricanes of 2005 – it has been able to ‘reload’ its capital quickly, with many new entrants benefiting. But it is unlikely in today’s economic climate that the market will be able to react with the same speed and volume that occurred after past events.
Plus, unlike in 2001 and 2005, any new capital may be more attracted to incumbents rather than new entrants. If such a market-changing event were to take place, businesses with multiple underwriting platforms, strong balance sheets and the ability to access new capital quickly will flourish.
M&A activity is likely to increase in the reinsurance market as businesses seek to gain access to capital, scale advantages and diversification benefits, while a number of reinsurers trade at below book value. As 2010 approaches, reinsurers will continue to look for international platforms and product diversification, and to seek opportunities to deploy capital efficiently. Reinsurers will be looking forward to a very interesting 2010.
Stephen Ross is an insurance partner at Deloitte