Global Storms hitting Re-Insurance industry. To mitigate, higher costs, lower growth and margins, m&a could be a route for the companies. Listed re-insurance companies include, Alleghany Corporation (Y US), Axis Capital Holdigs (AXS US), Reinsurance Group of America (RGA US) and Everest Re Group (RE US).
2017 was the worst year on record for re-insurance companies. Hurricanes such as Harvey, Irma and Maria caused over $135bn worth of damages according to Munich Re. Already this year Moody’s assess total damages of $17-22bn according to CNBC. Further they note;
“We were close to $10 [billion] to $15 billion on Friday. The flooding is more extensive than we had anticipated, and the storm was slow moving. It hung over the Carolinas a lot more than was expected,” said Mark Zandi, chief economist at Moody’s Analytics. He said the number could be adjusted based on further flooding, as some rivers are not expected to crest until later in the week. Moody’s said Florence is among the 10 costliest hurricanes
All of this post massive forest fires around the world, enormous Typhoon Mangkhut in Asia this past w/e. SCMP writes;
One assessor estimated that claims could exceed US$1 billion, which would make Typhoon Mangkhut the most destructive storm in local history.
All of this has led to higher losses and lower margins for re-insurance companies. Historically, huge losses have meant steep increase in rate increases. This does not seem to be the case going forward with rate increases of 0-5% in 2018 and expected same in 2019. Reuters points out the cause of this, increased competition from other investors such as hedge funds;
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.
One way to mitigate this storm for the re-insurance companies is through m&a. This is something Fitch emphasized at the re-insurance companies global gathering earlier this month according to Insurance Journal;
The firm said intense market competition and capital levels will continue to drive merger and acquisition (M&A) activity in the reinsurance sector while smaller players lacking scale and diversification will see further pressure on growth and profitability.
Marginalized companies are increasingly incentivized to explore M&A, as they face the challenges of operating in a difficult market environment, according to Fitch.
These factors, coupled with the impact of the U.S. tax reforms and the record 2017 catastrophe losses, should support M&A activity for the sector into 2019, the firm’s analysts said
The m&a spree has already started. Earlier this year Argo Group, for example, recently tried to buy Aspen Insurance, but was beaten by Apollo Global Management. Below is a list of recent deals.
Source: Reinsurance News
Examples of companies in the sector keep an eye for are;
As an investor or trader, beyond these companies, there are no pure re-insurance ETFs but one can trade IAK US, KIE US or KBWP US as general insurance ETFs that have good exposure to re-insurance sector.
Summary: As the frequency of various forms of storms and natural disasters increase, it will be good to put various companies in the Re-Insurance sector on the radar, as one major way of counter decline in growth, and lower margins is through m&a.