M&A is on the way

In the run-up to Christmas, the reinsurance industry becomes a hive of activity as underwriters buzz around, haggling over prices.

The industry is well accustomed to a frantic build-up towards the year end. But this year,

I feel it will be different. Following their return from the market's annual shindig in Baden Baden, reinsurers are suggesting that the

1 January renewal deadline will be pushed right to its limit.

This has been a benign hurricane season, yet reinsurers want to raise rates further. They say higher premiums are needed to account for the threat of global warming.

Against a background of predicted bumper results and rocketing rates, another topic besides the 1/1 renewals is dominating boardroom conversations. Consolidation.

We've already seen some Lloyd's syndicates pair up - take Catlin and Wellington Underwriting's planned marriage, for example. And Hardy Underwriting has been touted as a possible takeover target.

And it's not just Lloyd's syndicates which are thought to be attractive. My last few Stockwatch columns have featured traders suggesting that more takeover activity could be on the way.

Resolution is up for sale, and some dealers have speculated it could partner with Prudential. Legal & General and Aviva have also generated their fair share of column inches.

Admittedly, many of these rumours are simply that, just rumours. Yet I believe some of these stories will actually be true.

Why should there be takeover activity now? Interest rates may have risen to 5%, but in terms of historic lending, rates are still cheap. Venture capitalists are circling every sector, looking for prey as the return from leaving the money in banks or bonds just isn't appealing.

There are also more foreign predators now, and although the European Central Bank has raised rates several times this year, its key rate stands at just 3.25%.

Consolidation is a good thing and something the industry should not be afraid of. If this trend continues, it demonstrates how undervalued some insurers are and what bright prospects they have.

It is about time that the outside world took a closer look at the opportunities in the insurance market.

The quest for cost savings and synergies is always lurking at the back of bosses' minds. Lloyd's is testimony to that. It used to be the home of around 430 syndicates in the mid-1980s. Although this has dropped partly due to rule changes - previously there was one syndicate for every line of business - now the world's largest insurance market has just 66 underwriting entities.

Like the 1/1 renewal season, M&A is something we that will keep us increasingly occupied. If all the signals are right, we are just about to enter a new phase in its cycle. IT

Yvette Essen is stock market reporter for the Daily Telegraph