Roundtable: Macroeconomic conditions to press pause on major reinsurance broker M&A
The current macroeconomic environment with its heightened cost of capital and elevated interest rates will cause a pause in major (re)insurance broker M&A activity, with intermediaries instead increasingly focused on bringing in talent to strengthen their operations, a panel of industry executives believes.
Speaking during a roundtable hosted by The Insurer in partnership with Lloyds Bank during the Monte Carlo Rendez-Vous, Mark Craig, chief financial officer at Howden Group, said the higher cost of capital will “probably have an impact on the amount of M&A in the brokerage space”.
Howden has itself undertaken considerable M&A efforts in recent years, most notably its acquisition of reinsurance broker TigerRisk to form Howden Tiger, a deal it completed at the beginning of this year.
“In most areas, the higher cost of capital will result in a big drop in M&A, but in brokerage generally, the M&A has continued quite strongly,” said Craig.
“But obviously if money costs at least twice as much as it used to to borrow the debt, I think in the medium term it is likely to cause a slowdown,” the Howden executive added.
Through its acquisition of TigerRisk, Howden significantly strengthened its position in the reinsurance broking market, a sector that is seeing greater competition with a host of start-ups or reboots entering the space in recent years – Lockton Re, Acrisure Re, Alliant Re and Gallagher Re, among other examples.
At the same time, WTW is understood to be considering re-entering the reinsurance broking space, close to two years after selling Willis Re to Arthur J Gallagher.
QBE Re managing director Chris Killourhy was positive about the increased choice of reinsurance brokers now on offer.
“Choice is good and if the outcome is more investment in talent and tools, we see that as positive,” he said.
But he voiced concerns about what could be driving cedants and accounts to switch reinsurance broker.
“How do we ensure that the big thing that is driving [the moves] is not a commitment to reduced pricing?” said Killourhy.
“How do we ensure that the value the new brokers bring is not ‘By coming to us, we can get you a better price?’ It’s got to convert into something that is more valuable,” he added.
Pause in (re)insurance broker M&A?
Simon Hedley, CEO of Acrisure Re – another of the reinsurance brokers looking to shake up the concentration of business managed by Aon’s Reinsurance Solutions, Guy Carpenter and Gallagher Re – said cedants and reinsurers both “certainly welcome some extra choice”.
Even though the number of global reinsurance brokers is low, Hedley forecast that, while there are a couple of regional start-up reinsurance brokers seeking to enter the market, ultimately there is likely to be further consolidation, with Acrisure Re and others no doubt looking to acquire.
According to Hedley, the multiple for which TigerRisk was acquired by Howden “made people sit up and I think that was a fairly unique situation”.
“And even though the list [of firms that could potentially be acquired] is likely to remain short, there probably will be some further consolidation down the road,” he continued.
James Potter, CEO of Aventum Group-owned specialty MGA Rokstone, was less sure about further reinsurance broker M&A, at least in the short term.
“The consolidation will just pause for the next 12 to 24 months just because of the interest rates,” he predicted.
“I believe there'll be a pause, and you'll just see the talent merry-go-round continue.”
Howden’s Craig forecast there will be little major (re)insurance broker M&A in the near term.
“I think we're unlikely to see significant very large or multi-billion dollar M&A in the broking and reinsurance broking space over the next 12 months. The interest rates are higher, lenders more cautious, and the number of candidates that could be acquired is lower,” Craig said.
“It's a difficult market to finance very large M&A, and so I think it's going to be relatively quiet for the next couple of years. There’ll be more hiring of individuals, but I think the actual big transactions are less likely,” the Howden executive forecast.
Tough macroeconomic conditions
Looking at broader macroeconomic conditions, SiriusPoint CEO Scott Egan described the current environment that the (re)insurance industry finds itself in as “tough”.
“It doesn’t matter if it's property, casualty, or specialty. If I stand back, I can't find many markets where the macroeconomic conditions aren’t pushing our costs up,” Egan stated.
“We have to wake up to that as reinsurers, we have to wake up as primary carriers, and the customer ultimately has to accept that as well,” he added.
Terri Barnett, relationship director, insurance at Lloyds Bank, said that from a banking perspective, the current macroeconomic environment’s high interest rates and elevated inflation are causing the cost of capital “to go through the roof”.
Michael Smyth, Lloyds Bank relationship director, agreed broadly with his colleague’s assessment, although he noted that interest rates, despite being elevated, “are not wildly high”.
“They are not at historically problematic levels. But they went up quickly, and it’s caused a relatively small period, probably, of dislocation because they went from being so low to a more average level so quickly,” noted Smyth.
As the Lloyds Bank executive explained, that is causing companies, including acquisitive brokers, to adjust their business strategies in response.
“Others are having to deal with the impact on their fixed income portfolios, and although some of that is starting to be earned back already, it will take years for that to be fully earned through,” Smyth said.
And while Smyth said “we are seeing a lot of dislocation”, he forecast the longevity of these conditions could be “quite short”.
Despite the array of macroeconomic challenges, Lloyds Bank’s Barnett said there is “ample capital in the market”, and more of it is entering the sector, albeit not necessarily from traditional sources.
“There is plenty of capital, it’s just coming in via different types,” she said.
“We’re seeing an increasing number of companies exploring the London Bridge structure, which provides the opportunity for new investors to enter the Lloyd’s market.
“And we’re probably seeing a wider variety of groups injecting capital into the market versus what we’ve been seeing in previous years,” Barnett detailed.
The roundtable participants highlighted a variety of ways in which the current macroeconomic environment has impacted the (re)insurance industry.
Guy Carpenter’s global head of distribution Lara Mowery said clients have had to rethink their portfolios and how inflationary pressure has impacted their books of business.
Clients, Mowery said, have also had to figure out how to provide the data to reinsurers on how their portfolios have been, and continue to be, affected by materially increasing values.
“The cedants had to be able to pull all of that information together because it hasn't really been a talking point that they have historically had to address,” said Mowery.
“They had to figure out what these meaningful adjustments meant in terms of where the price adequacy was in the product they were buying, and how much they should be buying, because of the changes in underlying portfolio dynamics,” Mowery noted.
Howden’s Craig said the higher cost of capital “probably reduces our appetite slightly to put more money into capacity vehicles because it's costing us more to borrow so the vehicles have got to have a higher return to cover the costs”.