Reinsurers see M&A as solution for tough markets
Tough market conditions for global reinsurers is forcing them to review their long-term relevance and many are resorting to M&A to build scale, acquire expertise, and diversify, according to S&P Global Ratings.
Following an active 2017, total announced global insurance estimated transaction volume for first-half 2018 was $48 billion, according to a report titled "Bulking Up: The Global Reinsurance Sector Marches Toward Consolidation".
Two sizable deals, American International Group (AIG) acquiring Validus Holdings and AXA SA acquiring XL Group, contributed $21 billion to this amount. Both deals valued the target entity at about 1.5x price-to-book, attractive valuations by any measure, though not as high as those observed when Asian buyers were willing to pay around 2x book value, S&P noted.
Reinsurers face heightened competition, limited growth opportunities, and continued pressure on pricing. Tough market conditions and structural changes still weigh on global reinsurers' competitive position. Scale, diversification, and value-added services will become increasingly important if reinsurers are to meet cedants' changing expectations and remain relevant, according to S&P.
“We do not anticipate any let-up in the key factors underlying the sector's structural headwinds, which include excess reinsurance capacity, ongoing growth in alternative capital, the commoditization of property risk, and cedants' changing behaviour,” S&P analysts noted.
M&A is just one of the strategies reinsurers are using to prepare for the task of rebalancing the reinsurer/broker/cedant relationships and further adapting to the convergence of reinsurance and the capital markets.
“Unless we see a market-changing event, we do not expect the recent consolidation to materially alter market dynamics over the next 12-24 months,” the analysts said.
“A well-executed strategic deal that has a sound rationale can improve prospects for the combined entity through a stronger competitive position built on scale, product expertise, diversity, and profitability, all of which can help maintain or potentially strengthen the creditworthiness. That said, such deals carry risks for both the acquirer and the target that can't be overlooked, especially given the industry's mediocre track record. As such, we maintain an overall neutral view of reinsurance industry M&A, with a slight negative bias,” the analysts added.
Get all the latest re/insurance industry news with our daily newsletter - sign up here.
More of today's news
Swiss Re appoints Higginbotham as new EMEA reinsurance CEO
Paraline UK and Beat Capital sign merger deal
Arch Capital secures $653m reinsurance from capital markets
Kingstone reduces quota share of reinsurance treaty
SCOR reinsures Legal & General £300m longevity deal
Insurtech Oscar secures $375m from Google parent Alphabet
Hurricane Lane hits Hawaii
Travelers acquires majority stake in Toronto-based Zensurance
Startups target $15bn title insurance business
RLI founder passes away
