Fitch warns on pure scale acquisitions

Rating agency Fitch has warned that it is likely to view mergers and acquisitions (M&A) driven solely by the desire to achieve greater scale and diversity negatively.

It explained that although it supports the view that scale and diversity are attributes that are likely to improve reinsurers’ long-term fortunes, if it is not apparent that the new larger entity would have a stronger market position then it would view the activity negatively.

“We view the largest reinsurers as being best able to successfully manage through a protracted soft market. Significant business and portfolio diversity is a key factor,” said the rating agency.

“At the highest level, the largest reinsurers enjoy geographic and sub-sector diversity, writing a combination of P&C and life reinsurance, as well as primary business (in some cases), on a global scale.”

Fitch added that if the soft cycle continues, smaller, less diversified reinsurers will have a diminishing ability to decline unprofitable business, as they would risk eroding their position on a panel or market share.