By Leslie Scism
It's deal time for property-casualty insurance companies.
Ace Ltd.'s $28.3 billion acquisition of Chubb Corp. Wednesday is
part of a frenzy of deal activity being driven by low interest
rates and muted hurricane damage in the U.S. over the past couple
of years, according to insurance-industry analysts, brokers and
executives.
Low interest rates are pinching insurers' investment income,
which accounts for a significant portion of their profit as they
invest premium dollars until claims have to be paid. What's more,
property-casualty insurers are facing pressure from what most
people view as a stroke of good luck: Relatively modest hurricane
claims since 2012, the year of Superstorm Sandy. With fewer claims
checks being sent to individuals and consumers, insurers' capital
bases are growing, and their stepped-up competition with each other
to put that capital to work is depressing prices.
"We're in a world of low growth. We're in a world of low
inflation," ACE Chief Executive Evan Greenberg said on a conference
call Wednesday. "That's a world we need to face, all of that is
part of the backdrop when I think of the compelling strategic
nature of this transaction."
There are broader factors at play, too. The Ace deal comes amid
a general boom in M&A activity across sectors, from technology
to health care, driven in part by executives' fear of being left
behind rivals who strike deals.
In response to the need to put growing capital to work, many
property-casualty insurers have been running large share-buyback
programs.
But numerous deals already are in the works involving
reinsurers, the companies that take on some, or all, of the risk of
policies sold by insurers to individuals and businesses. Those
deals are being fueled by another interest-rate-related
phenomenon--a huge influx of money into the reinsurance business
from pension funds, family-wealth offices and sovereign-wealth
funds, among others, as they seek diversification and
higher-yielding investments amid low interest rates.
Last year, the amount of "alternative capital" from pension
funds, hedge funds, family offices and others invested in
reinsurance vehicles jumped 28% to $64 billion, out of total
reinsurer capital of $575 billion, according to reinsurance broker
Aon Benfield.
Pension funds have been scooping up so-called catastrophe bonds.
These securities allow insurers to tap the capital markets as a
sometimes lower-cost alternative to reinsurance. All this new money
is depressing reinsurance prices, yet brokers expect more to
arrive. Pension funds account for most of this capital and are
satisfied with far lower returns than traditional reinsurers,
brokers say.
And as the reinsurance market becomes more competitive, many
reinsurers have begun selling more primary insurance, putting
pressure on the rates that insurers can charge businesses.
Since late last year, multibillion-dollar deals have been
announced between XL Group PLC and Catlin Group Ltd., Axis Capital
Holdings Ltd. and PartnerRe Ltd., and RenaissanceRe Holdings Ltd.
and Platinum Underwriters Holdings Ltd.
Another category of deals that are cropping up involve Japanese
acquirers, as many Japanese insurers face "a shrinking domestic
market and regulators have indicated their preference for these
companies to diversify their operations," Morgan Stanley analysts
said in a recent report. It predicted $5 billion or below as "the
sweet spot" for such transactions.
Write to Leslie Scism at leslie.scism@wsj.com
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