September 17, 2018 / 12:00 PM / 2 years ago

Breakingviews - Reinsurers’ lean years will trigger M&A wave

Oliver Kelly, 1 year old, cries as he is carried off the sheriff's airboat during his rescue from rising flood waters in the aftermath of Hurricane Florence in Leland, North Carolina, U.S., September 16, 2018. REUTERS/Jonathan Drake

LONDON (Reuters Breakingviews) - Reinsurers are facing a perfect storm of higher losses and lower margins. The answer is likely to be a wave of dealmaking.

Insurers are still recovering from the worst year on record for catastrophe losses. In 2017, hurricanes Harvey, Irma, Maria and other perils caused $135 billion of damage, according to Munich Re. Florence, which has caused flooding in North and South Carolina, is expected to cost a further $20 billion, and comes after wildfires across the globe, and alongside Typhoon Mangkhut in Asia. Global warming may mean higher losses are here to stay. Losses have been nearly double the 10-year average in two of the last seven years, according to Aon.

In the past, a surge of claims led to higher prices as losses forced weaker players to cut risk, and the stronger or lucky ones to jack up premium rates. Yet premiums rose by just 0 percent to 5 percent in 2018. Fitch expects a similar level of increase in 2019. The problem is that new investors like hedge funds are increasingly underwriting catastrophe risk, as an alternative to stocks and bonds. They are unlikely to go away, barring a more severe catastrophe. Analysts at RBC reckon losses would need to exceed $100 billion this year to push up rates. That leaves reinsurers facing a period of lean years. On average they can now expect a 30 percent operating margin from underwriting catastrophe risk, nearly half the level five years ago, according to RBC.

Mergers may help weather the storm. Larger reinsurers can spread risk across a broader range of businesses, and invest more in hot new areas like cyber security. Barclays analysts reckon that any reinsurer with a market capitalisation of less than $10 billion will need to bulk up. Argo Group, for example, recently tried to buy Aspen Insurance, but was beaten by Apollo Global Management. With disasters on the increase, reinsurers will need to seek safety in numbers.


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