Three years ago the market was rife with merger and acquisition (M&A) transactions aimed at scale and market footprint building, however, the trend now for M&As appears to be leaning toward finding a home in a larger organisation, according to A.M. Best’s recent market report on the U.S. property/casualty space.
In M&A transactions, companies seek out opportunities to have autonomy and be nimble but have some parental protection, as seen with the Endurance/ Sompo and Allied World/Fairfax acquisitions, A.M. Best said.
Conditions remain ripe for M&A to continue over the next few years, with companies flush with capital, limited opportunities for organic growth, borrowing still being relatively inexpensive, and some companies struggling to cover the cost-of-capital.
The rating agency believes the Bermuda market is under the most pressure, given “its market’s rather anaemic return on equity (ROE) of 6.8% for 2016 and the expectation that ROE in 2017 will be minimal.”
Over the last few years of a soft market environment, A.M. Best also noted a trend of firms having shifted more significantly into primary lines although the majority of profit for many reinsurers with primary business is still coming from the reinsurance side, while primary results are around break-even.
The rating agency added that amid uncertainty around what it would take to turn the market, “the one certainty that remains is that reinsurers will have to continue to evolve, learning from their mistakes and successes. No doubt there may very well be some surprises that come along with that evolution.”
