Ursano: Reinsurers “had enough” of more risk for less reward
The reinsurance industry is increasingly united behind the belief that it has been taking increasing risk for inadequate rates, and instead needs to be paid for the risk it assumes, Tony Ursano has said.
Ursano has been taking the temperature of discussions in Monte Carlo this year, revealing the industry’s frustrations in an interview with The Insurer TV at the event.
“I think, to some extent, the industry and its capital providers may have had enough,” said industry veteran Ursano, who is managing partner and co-founder of newly launched M&A capital advisory specialist Insurance Advisory Partners LLC.
A rising hard market tide will benefit the whole sector, Ursano suggested.
“It’s a terrific dynamic that the industry is seeing a hardening in terms of pricing and terms and conditions. More needs to happen, but it’s a good dynamic for an industry that frankly has charged too little for such a valuable product for so long,” he added.
To make matters worse for reinsurers in recent years, the world has only got riskier, stressed Ursano.
A cocktail of threats besetting reinsurers were listed by Ursano, including the pandemic, rising inflation, climate change, political and economic uncertainty, declining bond yields, emerging and systemic risks, as well as future black swans.
“There is a growing consensus, acknowledgement and resolve around the fact that the world is becoming a riskier place, and that the industry, which provides an invaluable societal benefit through ensuring resiliency, needs to get paid for the risk it assumes.”
Ursano cited a report from McKinsey, published in February, which stated that insurance is a value-destroying industry, with around half of listed insurance companies across the world consistently trading below their book value over the past five years, “an embarrassing statistic”, he said.
“There is a real sense that the industry needs to get paid for the risk it assumes,” he said. “It’s further accentuated by the fact that for a long period of time, the industry has been earning a return on capital less than its cost of capital.”
The launch of his new advisory business comes in a year that has seen major mergers, such as the Howden-TigerRisk deal on the reinsurance broking side, and Berkshire Hathaway’s takeover of Alleghany on the underwriting side.
“There’s been a whole series of transactions, which is a continuation of the theme for the rest of this year, because insurance M&A, and M&A in general, has a long lead time. I think about it as a continuation over the next 12 months,” he said.
While at the Rendez-Vous, Insurance Advisory Partners has announced fresh appointments of its own. The start-up has brought in Robin Mackie as senior advisor in London and Samantha Hagar as an associate in New York.
Mackie brings experience in investment banking, insurance, venture capital and private equity. Hagar joins from PNC Capital Markets, where she was an associate director in the insurance division of its financial institutions team.
Macroeconomic factors, such as inflation and broader economic uncertainty, will have “a dampening effect on valuations” for upcoming M&A deals, Ursano acknowledged, keeping corporate shopping sprees within rational budgets.
“This is an environment where it’s unlikely that we see someone be irrationally exuberant, and where the ‘dare-to-be-great’ speech is not going to resonate particularly well. I don’t think it’s going to interfere with valuations, but I think it’s going to keep a lid on rational valuations in the consolidation arena,” he said.
None of this will keep firms from buying each other, he emphasised, and the merger outlook looks particularly busy for insurance services firms, Ursano reckons, thanks to the sector’s sound business model throughout the market cycle and “endless” private equity suitors.
“It’s a big focus for us,” he said. “The reason for sustained interest at record high multiples is simple. You’ve got fee-based businesses which are not capital-intensive and which are highly cash-generative. You’ve got businesses that have a recurring revenue model, where you might have 80-90-95 percent retention rates.”
Insurtech mergers are on the horizon, too, he suggested.
“On the insurtech side, you’re seeing the availability of their venture capital dry up and therefore a pivot towards M&A,” Ursano said. “It’s a continuation of the same consolidation theme that has been going on in this industry for the last five years.”