Rating agency Fitch highlighted in its report on last year’s reinsurance trends that Merger and acquisition (M&A) activity is not only growing in response to limited organic expansion options, but also as firms with reinsurance operations increasingly become the target of foreign companies seeking to move capital and operations into the international market.
Fitch commented that “many of the recent notable deals involve entities seeking to deploy capital abroad. This trend reflects a desire to diversify and grow business outside their home region and core markets.”
In March 2017, Japanese insurer, Sompo Holdings purchased Bermuda-domiciled Endurance Specialty Holdings for $6.3 billion.
Canada-based Fairfax Financial Holdings also announced in December 2016 that it would purchase Bermuda re/insurer Allied World for $4.9 billion.
“These transactions follow three deals involving buyers seeking to deploy capital abroad that closed in the first part of 2016. This includes Japan’s MitsuiSumitomoInsuranceCo.’s purchase of UK re/insurance company AmlinPLC, the purchase of Bermuda-based PartnerRe by EXOR N.V., a Netherlands-domiciled, Italian-based listed investment company, and the purchase of Sirius International Group, by China Minsheng Investment Group Corp., a private investment company in China,” said Fitch.
The Fitch report noted that the trend of reinsurance sector M&A transactions being used for diversification has been on the increase since late 2014, as companies “embraced consolidation as a strategic option to combat reinsurance market stress.”
And with a negative outlook forecast for the remainder of 2017, M&A activity is likely to continue to grow, spurred on not only by a competitive market environment, but also by foreign firms’ desire for enhanced scale and diversification.
Recent valuation multiples for deals have dropped into the more reasonable 1.3x-1.5x book value range after pricing jumped to near and above 2.0x, Fitch said.
The Bermudian re/insurance market is a further example of market growth that’s been propped up foreign firm’s acquisitions.
S&P Ratings also commented on the growing trend within the Bermudian hub in its Quarterly Insights report into the Bermudian market; “As the soft market continued to constrain rates, premium growth was aided primarily by recently completed acquisitions. For example, Arch Capital Group Ltd.’s GPW increased 15.5%, primarily due to its acquisition of United Guaranty Corp., which closed in December 2016.
“Argo Group International Holdings Ltd.’s 15.2% top-line growth was bolstered by its acquisition of Ariel Reinsurance Co. Ltd., which closed in February 2017.”
Acquisition is clearly supporting growth for Bermudian reinsurers, where in spite of a sluggish market, “gross premiums written for the Bermudians rose 5.5% to $17.54 billion in first-quarter 2017 from $16.64 billion in first-quarter 2016,” according to S&P Ratings.
Fitch also said in a report earlier this year that M&A activity had become more competitive last year, with valuation multiples shooting up as Chinese and Japanese reinsurers follow international earning diversification strategies.
Valuation multiples for M&A activity had risen last year to nearly 2.0x due to the influx of Asian capital as it enters the market beyond the Asia-Pacific region to compete with major European and North American reinsurers.
More recently this figure has reportedly fallen to a more normal book value range of 1.3x–1.5x.
For the well-established European reinsurers, evaluation of M&A activity shows cautious players choosing to push slowly onwards in a tough market with continual but small-scale growth patterns.
The major European reinsurers are expected to focus on new markets or sectors, striking smaller add-on M&A deals in the coming year.
M&A activity being driven increasingly by foreign firms seeking diversification and movement of capital into the global market, reflect shifts in the dynamics of the global economy and geopolitical environment, as more recent players from emerging markets begin to make their mark on an international level and compete with traditional players.
This growing international competition could act as a further catalyst for industry change, with firms racing to innovate to offer more efficient, consumer-focused processes and products as they move into new markets and business lines.
It also underlines the growing demand for reinsurance entities, which are expected to be drawn on increasingly not only as new lines such as cyber solutions come into the market, but also as emerging markets develop and seek out global reinsurance solutions.