M&A activity to continue as reinsurers grapple with challenging conditions, claims new report

Challenging business conditions, coupled with cheap financing in the debt market, will continue to fuel mergers and acquisitions (M&A) activity and drive consolidation in the global reinsurance market, according to a new report from Standard & Poor (S&P).

The rating agency suggests that despite benefiting from modest rate increases in 2018 and in the first half of 2019 following two years of record catastrophe losses, the pressure remains on the sector's earnings, with plentiful traditional and alternative capacity, changing cedants' demand, and the commoditization of property risks.

S&P noted that these conditions have pushed reinsurers to try to strengthen their relevance and improve the resilience of their business and financial positions. To achieve this, the industry has employed various strategies, including highly tailored reinsurance solutions, pairing up with alternative capital providers, enhancing digital capabilities, and exploring opportunities to close the protection gap.

"Reinsurers' M&A activity is still a hot topic," S&P said. "Particularly because some players are posting subpar shareholder returns due to cost inefficiency, margin pressure, and still-excess capacity. Through the first half of 2019, the deal value of M&A activity in the insurance world totalled more than $20 billion. Whilst this is below the average of recent years (compared to same periods in prior years) we think this represents a temporary lull rather than the end of the M&A dance."

The report also highlighted that the ongoing convergence of the insurance, reinsurance, and insurance-linked securities (ILS) markets through M&A will continue.

Furthermore, companies with a more narrow business profile or limited geographic footprint will likely either consider M&A or become targets themselves.

However, S&P concluded that it does not expect consolidation among the top 10 reinsurers as they already account for about 70 percent of the total net reinsurance premium (about $210 billion) emanating from the top 25 reinsurers. And, many of them have a material amount of direct insurance business.

"A merger among these reinsurers would bring not only significant execution risk, but also counterparty concentration risk for the cedants, and thereby could lead to a substantial overlap and the resulting loss of business for the consolidated group."

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