Credit analysts are more interested in M&A rationale than scope

While a merger or acquisition (M&A) can seem an appealing prospect to small and medium-sized reinsurers grappling with challenging market conditions, the rationale behind such a deal and its execution will both be critical to the way analysts at rating agencies view it.

That was one of the key points made by Martyn Street, co-head of reinsurance at Fitch Ratings, at a pre-Monte Carlo Fitch Ratings Global Reinsurance Outlook meeting in London.

He said that analysts in rating agencies will usually be more concerned with the rationale behind such deals and will be wary of potential execution risks. “As credit analysts we tend to be cautious—and M&A is no exception,” Street said.

M&A activity has been muted so far this year, a trend in contrast to 2015 during which a number of big deals took place and a lot of capital entered the market from Asian reinsurers looking to diversify.

But Fitch believes the flow of deals is likely to resume in the near term as companies consider their strategic options as they combat a competitive and challenging market.

Street stressed that analysts concerned with the rationale considering the merits of deals will be more interested in whether an acquisition makes sense and the reasons behind it.

Understanding the timeframe of the execution is also particularly important, he said. He added that if M&A activity takes longer than three to six months to finalise, Fitch may put companies’ ratings on credit watch negative because of this execution risk.

“If there is some uncertainty around how it is executed, this may affect a firm’s financial position,” said Street.