ACE-Chubb: Why Insurers Are Merging Now -- Update

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 [e-mail]

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