S&P report claims M&A on the mind of global reinsurers

S&P Global Ratings has claimed in a new report that tough market conditions for global reinsurers are forcing them to review their long-term relevance.

According to the report, entitled ‘Bulking up: the global reinsurance sector marches toward consolidation’, reinsurers face heightened competition, limited growth opportunities, and continued pressure on pricing. Because of this many are resorting to M&A to build scale, acquire expertise, and diversify. As a result S&P claims that 2018 has started with a bang, as following an active 2017, total announced global insurance estimated transaction volume for first-half 2018 was $48 billion.

S&P pointed out that there were two sizable deals, American International Group acquiring Validus Holdings and AXA SA acquiring XL Group, which contributed $21 billion to this amount.

In a statement S&P said that: “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 behavior. 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. 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.”