M&A party will continue – but latecomers may pay the price: Moody’s
Challenging market conditions mean the re/insurance industry is poised for yet more consolidation, but transactions will become more challenging because of the smaller pool of acquisition targets, Moody’s has claimed in a new report called ‘More M&A deals as firms seek to broaden depth, scale and market relevance’.
The rating agency noted that following the two big deals at the start of the year – American International Group's purchase of Validus Holdings and AXA’s purchase of XL Group – rather than marking the end of a period of consolidation, was a signal of more to come.
It noted that the industry’s challenging operating environment continues to favour M&A. Last year’s record catastrophe losses did not result in the price hikes anticipated – although pricing was stable to moderately positive at the January 2018 renewal, it fell quickly through the next few months with modest increases at the June 1 renewal, well short of historical post-event price hardening cycles.
But as sector capacity remains plentiful and pricing increases are low, small to midsized reinsurers will remain under pressure to meet their return hurdles, and will likely consolidate into larger, well diversified firms to achieve scale and remain competitive, the report suggests.
It also said that new US tax laws, although likely to boost US-based reinsurers’ long term after-tax profitability, has also levelled the playing field for US based re/insurers relative to their non-US counterparts, primarily the Bermuda-based firms, because of the new BEAT tax provision. This additional tax is applied to premiums ceded by foreign domiciled (re)insurers to their non-US affiliates (5 percent in 2018, rising to 10 percent in 2019-25 and 12.5 percent after 2025).
The report noted that recent deals have involved large, well-diversified firms seeking to enter or expand specialty insurance platforms beyond life and P&C insurance. These firms benefit from diversifying their operations, obtaining technical expertise, and expanding distribution channels, and in combination with smaller firms are able to hold less capital than a given target would have held on its own.
But latecomers to the M&A party, might find good deals harder to come by, the report suggests. “Although the current operating environment is still supportive of M&A transactions, the number of potential candidates has declined, and sellers' expectations of high deal values could make future transactions more challenging,” it says.
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