Current climate favors reinsurer M&A activity

By: Bermuda Re

The reinsurance sector is likely to see increased merger and acquisition (M&A) activity as more stressful market conditions limit organic growth potential.

This is according to a newly-published report from Fitch Ratings, which said that the increased availability of alternative reinsurance could add to an M&A trend by providing further sources of capital to the market, while potentially reducing growth opportunities for traditional reinsurers in direct competition with the alternative providers.

The rating agency views a certain amount of consolidation as a modest positive for the reinsurance sector, as a reduction in the number of re/insurers and associated underwriting capacity would reduce un-deployed capital and likely ease competitive pressures.

Fitch said that Endurance’s failed unsolicited bid to buy Aspen Insurance highlights that one of the largest impediments to reinsurer M&A in recent years has been a lack of willing sellers. It also said that it reflects the stressful market conditions, with softening reinsurance pricing and broadening of policy terms and conditions resulting in a deteriorating profitability profile for the reinsurance sector.

Becoming a larger and more diverse organization can increase the chances of surviving the considerable industry headwinds, the rating agency said.

Recognition of inherent uncertainty tied to any large acquisition also leads to fewer consummated deals. These risks include significant integration challenges, uncertainty in relation to regulatory initiatives, and potentially destroying shareholder value by overpaying for an acquisition, particularly with the heightened risk of acquiring a company with inadequate reserves. As such, Fitch said it expects very few transformational acquisitions.

Several recent acquisitions by reinsurance companies were driven by a desire to diversify from the reinsurance business. Fitch generally views such transactions as a credit negative to the acquiring company in the near term, as they carry a greater risk of failure, with the acquirer venturing into less known territory. Over the long term, a well-executed and well-priced acquisition that provides diversification of earnings and business profile would be a credit positive to the company, it said.