A.M. Best has named M&A activity as the main factor affecting Western European insurers and reinsurers credit ratings last year, and while this trend is expected to continue throughout 2017, the rating agency has recommended firms focus on consolidating gains.
Despite tough market conditions of low investment yields and an increasingly competitive environment, A.M. Best has given European insurers and reinsurers a mostly stable credit rating for 2016, with 87 percent of rating actions being positive.
Analysis of A.M. Best’s Issuer Credit Ratings (ICRs) have attributed many of last year’s company upgrades to M&A activity, the agency reported; “A slight decline in “aa-” ICRs, but an uptick in “a+”, “a” and “a-” ratings.
“This was largely a result of the major merger and acquisition (M&A) activity that took place in the prior 12 to 24 months, and many of the changes have reflected companies joining larger groups,” said A.M. Best.
Broader distribution, enhanced risk management, improved governance, capital positions and risk profiles were further, less significant factors named by A.M. Best as contributing to 2016’s ratings upgrades.
And with continued tough market conditions expected to further drive M&A activity throughout 2017, A.M. Best has recommended re/insurers focus on consolidation of last year’s gains to ensure key underwriting talent is retained and goals of cost savings are actually achieved.
2016’s modest growth and slow expansion is expected to continue, but this year will see politics add another layer of uncertainty and risk for Western European re/insurers.
Another factor forecasted to add to the already increasing pressure from alternative capital vying for market space, is increased competition from U.S. firms as the EU/U.S. agreement for re/insurers materialises.
These conditions could see European insurers come under greater pressure to improve returns and remain attractive to capital providers – but A.M. Best argues that European insurers are well-placed to withstand these challenges.
Greg Carter, Managing Director, Analytics, said; “Future pressures are likely to come from the fallout of political events, such as the economic impact on European markets as the U.K. government unveils details of its plans to exit the European Union. However, this is a medium to longer-term issue and will not affect ratings immediately.”
Carter listed the rise of populist parties throughout Europe as a further destabilising factor for re/insurers.
A.M. Best reports these combined pressures will continue to drive the M&A trend as improved efficiency becomes a main option for improving returns and “niche portfolios…attract larger companies looking to diversify their portfolios.”
Yvette Essen, Director, Research & Communications, commented; “A.M. Best expects industry consolidation to continue in the coming year.
“Western European markets will see relatively modest economic growth, so expansion of insurance business volumes will be sluggish at best.”
This modest growth means A.M. Best does not expect 2017 to bring any major changes to credit ratings – reflecting Western European insurers’ strong balance sheets, enhanced Enterprise Risk Management, and overall strong position to withstand the upcoming challenges.
