Market conditions will continue to drive M&A: AM Best

Merger and acquisition (M&A) activity is expected to remain at the forefront of the management agenda as re/insurers increasingly seek ways to deploy capital and create scale in the continuing soft market conditions.

This is the finding of rating agency AM Best’s latest report: Insurance and Reinsurance Market Conditions Set the Scene for Further Takeover Activity.

The rating agency added that the low interest rate environment is also conducive to deal making, enabling cheaper borrowing to finance deals.

John Andre, AM Best group vice president, said: “We see numerous drivers fuelling M&A activity. In the reinsurance sector, a significant factor has been that rates and terms and conditions remain under pressure as a result of the recent period of benign loss activity and the influx of alternative capital.

“As competition is intensifying, operating margins are being squeezed. Additionally, primary companies are well-capitalised and retaining more risk on their balance sheets. Brokers are establishing smaller panels of reinsurers, with expertise and experience in particular lines of business, and the size of a company’s balance sheet is increasingly being seen as a way to strengthen negotiating positions with intermediaries.”

The rating agency added that although consolidation can be a positive step, there are numerous and significant execution risks associated with deals and the operational consolidation that will be required to realise expected efficiencies.

Attempts to expand a niche to other territories or related classes of business quickly has been the downfall of many companies, resulting in significant downgrades and insolvencies, according to AM Best.

It also added that the losers from this spate of takeover deals will likely be the smaller re/insurers and brokers, particularly those unable to demonstrate particular expertise.

Yvette Essen, director, research and communications, added: “AM Best expects that smaller reinsurers will continue to struggle as dominant companies can have more influence on terms and conditions or can steer business towards an affiliate.

“The policyholder theoretically will have less choice from an insurance provider, but at the same time can benefit from greater security through the purchase of protection from a stronger financially-sound entity with highly-refined underwriting ability and product offerings.”