Further M&A might be ahead claims S&P
Global reinsurers could see more consolidation, according to a new report from Standard & Poor’s (S&P).
S&P said that challenging market conditions in the global reinsurance sector and cheap financing sources will continue to drive consolidation, adding that merger and acquisition (M&A) activity over the past two years demonstrates the convergence of primary insurance, reinsurance, and insurance-linked securities markets, and the desire to diversify internationally.
According to S&P the global reinsurance sector continues to face challenging business conditions, although the sector managed to benefit from modest rate increases in 2018 and in the first half of 2019, after record back-to-back catastrophe losses in 2017 and 2018.
However, as noted in the report, pressure on the sector's earnings continues, with plentiful traditional and alternative capacity, changing cedents' demand, and the commoditisation of property risks. Thus, reinsurers want to strengthen their relevance and improve the resilience of their business and financial positions. To achieve this S&P said that 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.
S&P said in a comment about the report that: “Reinsurers' M&A activity is still a hot topic, 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.
“Continued challenging business conditions, coupled with cheap financing in the debt market, will continue to fuel M&A activity for the next few years. In particular, those competitors with a more narrow business profile or limited geographic footprint will likely either consider M&A or become targets themselves. Further, the ongoing convergence of the insurance, reinsurance, and insurance-linked securities (ILS) markets through M&A will continue.”
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. Furthermore, 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 cedents, and thereby could lead to a substantial overlap and the resulting loss of business for the consolidated group.
