M&A activity became more competitive last year, with valuation multiples shooting up as Chinese and Japanese reinsurers follow international earning diversification strategies, according to Fitch’s newly released study on reinsurance market trends.
Fitch said 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.
For the traditional reinsurance giants, larger scale M&A transactions are seen by Fitch analysts as being unlikely, with firms which already benefit from longer-term and highly diversified earnings running a tight ship in the M&A arena.
The rating agency said it maintained a cautious outlook for M&As in the coming year due to “execution and integration risks”, but added that some further activity could “help to achieve equilibrium between underwriting capacity supply and demand.”
In the long-term, however, Fitch believes reinsurers still stand to benefit from the scale, diversity, and “the increasingly global way in which reinsurance is transacted and to mitigate increases in fixed costs.”
And, all things considered, Fitch anticipates a slight increase in global M&A activity for 2017, but with “fewer short-term M&A deals, given the reduced number of Bermuda market companies looking to consolidate following recent transaction activity.”