Once the magnificent seven, listed independent underwriters at Lloyd's of London have been reduced to the not so magnificent four, following the £3.5bn bid for Amlin (AML) by Mitsui Sumitomo Insurance of Japan. Amlin is set to go the way of Brit Insurance, sold to Canadian insurance business Fairfax Financial for around £1.2bn and Catlin, bought by New York listed XL for about £2.8bn.
So what's the rush to buy into what is essentially a market plagued with soft premiums as a result of the benign claims in major catastrophes, and a wall of money looking to grab a piece of the action? With so much money chasing business, it's no surprise that maintaining underwriting discipline by only focusing on profitable activities has reduced the amount of decent business on offer. More to the point is, why pay so much? Brit was sold at a 73 per cent premium to net tangible assets; Catlin at 1.6 times and Amlin at a whopping 2.4 times. Not surprisingly, Amlin's veteran chief executive Charles Philipps doesn't expect to see a counter bid.
Reinsurers have had to alter their capital management strategies as capital deployment opportunities diminish. According to the Willis Reinsurance index, in the first half of this year, publicly listed companies within the index have returned virtually all earnings to shareholders - around £10bn via share buybacks and dividends compared with just £6bn in the whole of 2014. And as the oversupply of capital persists, so returns on equity continue to diminish. In the first half of the year, for those companies providing catastrophe loss disclosure based on a typical catastrophe year (which the current year is not) the average reported ROE was a reasonable 11.1 per cent, but exclude prior year reserve releases and this figure drops to just 5.1 per cent. In fact, the report from Willis Re shows that catastrophe losses in the first half have fallen 35 per cent from a year earlier, and at $16.5bn (£10.7bn) are the lowest for nine years.
Premiums for some asset classes are now at their lowest level since the early 2000s, and while rate reductions have slowed, the downward trend is expected to continue. However, fresh opportunities remain to be exploited, notably in cyber-related cover.
Consolidation this year through cross-border mergers has already passed the $50bn mark even before the Amlin deal, and is approaching the $65bn record set in 2006. Japanese groups have been responsible for around a third of this total. In part, this reflects the relatively poor return on low-risk Japanese investments, but also shows a desire to diversify away from Japan, which has a history of experiencing some very expensive natural disasters.
Muscling into the hallowed corridors of Lloyd's may look like an expensive exercise, but in doing so Japanese firms open up a gateway for expanding business into Europe as well as the US. Mitsui Sumitomo already has an operation at Lloyd's which it launched in 2000, and this will be subsumed into Amlin, which will continue to operate on a relatively stand-alone basis.
This is important because underwriting is essentially a people business. Underwriting managers are the key cogs to any such operation, and so keeping them on board is an essential prerequisite to any successful merger. No surprise then that Brit's chief executive Mark Cloutier had known Fairfax Financial's founder Prem Watsa for 30 years and once worked for him as a loss adjuster.
