Fitch Ratings is anticipating continued interest in merger and acquisition (M&A) activity among insurers and reinsurers in 2018, driven by ongoing competition, the impacts of the U.S. tax reform, and the effects of catastrophe losses in 2017.
Fitch said that AIG’s announced $5.6 billion takeover of Validus could foreshadow further M&A activity in the global re/insurance sector in 2018, especially in the Bermuda marketplace. Furthermore, industry reports that Allianz could be looking to acquire XL Group, and Swiss Re’s confirmation of discussions regarding a deal with SoftBank, highlights the potential for more M&A in the months ahead.
As market challenges persist, greater scale and diversification resulting from M&A could improve the resilience of companies, but Fitch does warn that any M&A activity presents both execution and integration risks which could hinder profitability.
Notably, said Fitch, a number of recent transactions have involved global companies buying into Bermuda or London, which provides growth into foreign markets.
At the same time, the recently enacted U.S. tax reforms lowers the tax advantage that Bermuda and other global insurers and reinsurers have over their U.S. counterparts, and Fitch said that this could see firms look to move more business to the U.S., “or enhance their geographic scope and competitive position through M&A.”
However, the ratings agency said that recent, slight improvements in property catastrophe re/insurance rates following Q3 and Q4 2017 catastrophe events, could reduce sellers’ interesting in finding a deal partner as revenue growth and rate adequacy provides opportunities.
“Fitch believes that M&A can benefit (re)insurers through greater scale, an enhanced profile, diversification and improved profitability. However, the operational risk associated with an unfocused or poorly controlled M&A strategy could outweigh the diversification benefits,” said Fitch.