London M&A will continue: AM Best

The current conditions in the specialist property and casualty sector, which have driven consolidation activity in the London market, are set to continue.

This is according to rating agency AM Best, which added that the need for insurers to leverage analytical capabilities and increase line size is becoming increasingly important in this market.

The rating agency explained that as brokers establish smaller panels of reinsurers, and reinsurance rates as well as terms and conditions face competitive pressure from alternative capital, the size of a company’s balance sheet is increasingly being seen as a way to strengthen negotiating positions with the large brokers.

“A combined entity can lead to reduced regulatory cost burdens and other efficiencies,” said Catherine Thomas, director, analytics. “However, value from synergies and expense reduction depends on successful post-completion integration. There is also a need to offset upfront transaction costs. Additional factors important to the success of any transaction include a strategic fit between the companies, solid business rationales and cultural compatibility.”

Yvette Essen, director, industry research - Europe & Emerging markets, added: “For companies looking to enter or expand into high-growth markets, Lloyd’s’ international licences in countries such as China and Brazil are a key consideration. Acquisition of a Lloyd’s vehicle may also offer diversification benefits, which can support cycle management.

“Insurers are able to reduce portfolios where pricing is under pressure without it having too great an impact on their overall book of business. Lloyd’s players tend to be better diversified than their specialist peers in Bermuda, which usually have a property catastrophe focus.”