Reinsurers eye merger trends at annual Monaco meeting

By Carolyn Cohn and Jonathan Gould

LONDON/FRANKFURT, Sept 11 (Reuters) - A prolonged decline in global reinsurance prices is spurring merger moves in the sector, with many executives attending next week's annual industry meeting in Monte Carlo eyeing who might next become predator or prey.

While the $600 billion industry, which helps insurers shoulder the burden of losses on costly events such as hurricanes and floods, is expected to see price declines slow to less than 10 percent next year, a hoped-for stabilisation in prices may come too late for many.

Merging with a peer is an increasingly attractive means of achieving scale and diversification, needed to escape margins being squeezed by a recent relatively low number of the major disasters which have the effect of pushing up reinsurance prices.

"M&A is a function of the pressure in the market right now and it's looking to relieve that pressure," said Greg Reisner, an analyst at credit rating agency A.M. Best.

Reinsurers' earnings have held up well so far, thanks to low catastrophe payouts and the release of reserves set aside for past claims that turned out not to be needed.

With low reinsurance prices capping prospects for profitably growing top-line premiums, many reinsurers have pledged to return cash to shareholders to burnish their allure.

Others are devoting their capital to buying peers.

Broker Aon said capital returned to investors by the 26 listed companies it follows totalled $9.8 billion in the first half, down from the previous year.

MS&AD's $5.3 billion purchase of Lloyd's of London underwriter Amlin (LSE: AML.L - news) this week is only the latest in a spate of reinsurance mergers.

ACQUISITION SPREE

Adding heft to an acquisition spree among western reinsurers, Japanese and Chinese buyers have cash and a desire to diversify into Europe and North America, industry specialists said.

Who could be next? Some analysts say small and medium-sized firms such as Hiscox (Berlin: H2X3.BE - news) and Beazley (Other OTC: BEAZF - news) could be targets, while large well-capitalised groups such as Munich Re and Hannover Re are likely to avoid the merger frenzy.

Elsewhere pricing trends are likely to be a talking point in Monte Carlo.

Reinsurance prices and returns have dropped in recent years, driven down by too much supply and reduced demand as insurance company clients chose to keep more risk, and profit, on their own books.

Cheaper products such as catastrophe bonds have also provided an alternative to traditional reinsurance and attracted yield-hungry institutional investors, who have enjoyed a windfall from years of below-normal damage claims from hurricanes or earthquakes.

Ratings agencies say reinsurance prices are likely to fall again next year.

But those price declines are seen slowing compared with the past few years, as mergers, share buybacks and rising bond yields look to have put a brake on the amount of capital at work in the sector.

"It (Other OTC: ITGL - news) looks like we are starting to reach an inflection point in capital inflows," David Flandro, global head of analytics at JLT Re, told an Insurance Insider conference this week. "It's the first time we have anything new to say in three years." (Editing by Thomas Atkins and David Holmes)