MONACO (Reuters) - Reinsurers are being squeezed by price competition and subdued demand from insurers for their products, and traditional mergers may not be enough to save those that lack either global reach or specialised focus.
Medium-sized, 'me-too' reinsurers are ripe for consolidation, executives at the industry's annual meeting in the Mediterranean resort of Monte Carlo said this week, with many wondering which companies might be around to attend in 2015.
The decline in premium prices is squeezing the earnings of reinsurers, who help their insurance company clients pay large damage claims in exchange for part of the premium.
Trapped in a tough market, medium-sized reinsurers may look to acquire better product or geographic diversification, different underwriting experience or technological innovation, said Tom Dawson, a partner specialised in insurance at U.S. law firm Drinker Biddle.
France's Scor (SCOR.PA), the world's fifth largest reinsurer, said it had no plans itself for takeovers but that other players might not be able to resist.
"Once the dance floor is open and the band is playing, people like to dance when they see others dancing," chief executive Denis Kessler said.
Credit rating agency Standard & Poor's said reinsurers are likely to achieve a return on equity (RoE) of just 7-9 percent this year, on a par with their cost of capital and well below the historical average of around 14 percent.
"About half of the (23) global rated reinsurers are more exposed to competitive and profitability pressures than others and could find it difficult to defend their competitive positions or maintain their capitalisation and profitability," S&P analyst Dennis Sugrue said.
Some smaller players could struggle to survive, he added.
"You can be a low-cost provider or a niche player, but you have to decide; it is not obvious that by just being around, you have a role to play in the future," said Christian Mumenthaler, head of reinsurance business at Swiss Re SRENH.VX.
Swiss Re and Munich Re (MUVGn.DE) are among a clutch of top reinsurers who can offer a full range of reinsurance products in every market worldwide, which even medium-sized players cannot.
"Sometimes it's true that you're buying just to get bigger but for so many in the business, you have to get an awful lot bigger to start punching at the same weight as a Munich, Swiss or Gen Re (BRKa.N)," said Dawson at Drinker Biddle.
Sompo Japan Insurance (8630.T) bought British privately-held reinsurer Canopius Group for nearly $1 billion (613.20 million pounds) late last year, and brokers like Willis WSH.N and Arthur J. Gallagher (AJG.N) have been snapping up expertise in key markets.
But a high profile effort by Bermuda-based Endurance ENH.N, which S&P classes as the world's 32nd biggest reinsurer, to acquire No. 33 player Aspen (AHL.N) ended in failure in July.
Endurance said Aspen's "focus on defensive self-preservation tactics" helped to stymie the bid.
Many top executives would not willingly give up the pay and prestige they get from running their own companies unless they came under severe pressure from shareholders to do so, many industry observers in Monte Carlo said.
"Pressure is growing (for M&A) but so far the resistance has been very strong," Moody's analyst Stan Rouyer told Reuters.
Some reinsurers might seek to branch out into insurance or transform themselves into asset managers specialised in insurance-linked securities, perhaps seeking hedge fund partners.
Those options may be better for hard-pressed medium-sized reinsurers than straight-forward mergers, where they would risk losing clients, underwriting teams and shareholder value.
"If you sew two dead sheep together, you still have two dead sheep," quipped a specialist M&A lawyer as he sipped a glass of champagne on the terrace of a Monte Carlo hotel.
Editing by Ruth Pitchford