In a recent interview, Berkshire Hathaway reinsurance leader Ajit Jain told the Wall Street Journal that tough industry changes will mean a change of investment strategy for Warren Buffett’s company.
“What was a very lucrative business is no longer a very lucrative business going forward,” Jain said. “But since the reinsurance business isn’t going to offer as many opportunities for the foreseeable future, we feel like we should go down the food chain.”
That means more money – and perhaps heightened merger and acquisition activity – in the commercial and wholesale space.
M&A transactions have already reached a historic $1.84 billion in value this year and, overseas at least, appetite for healthy insurance companies has not died down.
Beijing-based Fosun International – which made headlines this year with the acquisitions of Meadowbrook Insurance and Ironshore Inc. – recently reaffirmed its interest in the US market. In fact, owner Guo Guangchang proposed raising $1.5 billion in order to continue purchasing financial firms, including insurance operations.
In a filing, the company says it plans on using the money for “general corporate purposes, including mergers and acquisitions in the banking and insurance industry and repayment of loans.”
Meanwhile, profound changes are awaiting the reinsurance market.
The growth of alternative capital, particularly in the form of catastrophe bonds and other collateral-backed vehicles, now accounts for 12% of reinsurance capacity. That’s about twice what it was five years ago, according to financial rater Moody’s.
Additionally, the primary insurance market’s capacity is almost historic. Last year, these carriers passed on the lowest share of policy risk to the reinsurance market since before 2000s.
This is creating pressure on reinsurance pricing. The Wall Street Journal reported this week that preax profits for the Lloyd’s of London market were down nearly 30% in the first half of 2015 as compared to the same period last year.
“Mr. Jain and Mr. Buffett have seen the writing on the wall,” the WSJ report concludes. “Other investors would be wise to heed its message: reinsurance has a struggle ahead.”
Significant struggles and few growth opportunities in the reinsurance market may mean a shift in the way capital is spent – potentially to the benefit of carriers and wholesalers, if a leading Berkshire Hathaway executive is to be believed.