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New money weakens returns, set to drive insurance M&A

| MONACO, Sept 13

MONACO, Sept 13 Insurance executives meeting in Monaco are preparing for another wave of mergers and acquisitions, driven by competition and new money entering the market and driving down returns.

After record insurance deals totalling $126 billion in 2015, the figure for the first seven months of this year is only $15 billion, insurance broker Willis Towers Watson said.

Eye-watering valuations, such as the 2.4 times book value Japanese insurer Mitsui Sumitomo paid for Lloyd's insurer Amlin in a 3.5 billion pound ($4.67 billion) deal last year, had so far kept buyers on the sidelines, reinsurers gathered in Monte Carlo this week for their annual meeting said.

But that drop-off was likely to be just a pause, with too much money chasing too little business.

"We have a near-zero interest rate environment, investments are not that great, we have a competitive pricing situation," said Brian Duperreault, chief executive of Bermudan insurer Hamilton, adding that pressure on both sides of the business "has almost always led to mergers - you can minimize your cost base, you can get into businesses you did not have before".

Hamilton bought a Lloyd's of London business last year and Duperreault said he was considering buying a European insurer.

"We will continue to look there - I am not going to do it out of desperation," he said.

A record $585 billion in reinsurance capital has helped to drive down prices in the reinsurance market, although the pace of declines is starting to slow.

"There are powerful forces at play which will drive this market," Rafal Walkiewicz, chief executive of Willis Capital Markets & Advisory, said of the renewed push for M&A.

Ratings agency Fitch said this week that weak profitability would lead to a fresh M&A wave in reinsurance next year.

Reinsurers act as a financial backstop for insurance companies, helping them pay for large damage claims from hurricanes or earthquakes in exchange for part of the premium.

In addition to lower prices, insurers and reinsurers have not been able to rely on investment income from the premiums they receive in an era of ultra low interest rates.

LLOYD'S VALUATIONS

In the Lloyd's insurance market, valuations are starting to look a little more attractive to overseas buyers after the pound fell 10 percent against the dollar in the wake of Brexit.

Lloyd's companies such as Hiscox or Lancashire , which have long been seen as acquisition targets, could come into play, industry specialists said, Amlin, Brit and Catlin were bought by international insurers in recent years.

Specialist insurance investment manager Twelve Capital has even launched a strategy to invest in insurance M&A.

The Lloyd's market is "a sector that is ripe for consolidation," said William Hardcastle, head of insurance equity at Twelve Capital, adding that he thought the market would attract "many potential buyers".

U.S. insurer AIG is already in talks to sell its Lloyd's of London insurance operations to Canada Pension Plan Investment Board (CPPIB).

TIERS DRIVE GROWTH

In reinsurance, bigger players are seen able to command the highest prices, which is also driving M&A growth.

Christian Bieri, EMEA reinsurance head at MS Amlin, said Amlin's purchase by Mitsui Sumitomo put it in a higher league.

"There is a tiering in the market, you have to get bigger."

However, Swiss Re CEO Christian Mumenthaler said the world's second biggest reinsurer had no reinsurance acquisition plans, "because we already are a big player." ($1 = 0.7499 pounds) (Editing by Alexander Smith)

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