Reinsurance merger and acquisitions (M&A) activity has been in the doldrums somewhat in recent quarters, as the continued pressure on reinsurers has made them less attractive over time.
With tepid demand growth, pressure from high levels of excess traditional reinsurance capital, as well as growing competition from alternative capital providers, coupled with valuations that have not met investor targets, the reinsurance sector has fallen off the global M&A agenda somewhat, according to analysts at CreditSights.
But with the sector facing around $100 billion of catastrophe losses after the impacts of hurricanes Harvey, Irma and Maria, as well as other major losses from earthquakes in Mexico, wildfires in California and a relatively heavy convective storm season toll, there is a chance that M&A activity could spark up again on the back of any increase in reinsurance pricing.
CreditSights note that M&A seen to date has often involved the acquirer gaining access to a Lloyd’s of London platform for reinsurance business, but the Lloyd’s market is now heading for a loss and many global reinsurance firms are also looking at much lower profits for the full-year of 2017.
As a result, if valuations remain elevated among reinsurance businesses, it’s hard to foresee much in the way of M&A taking place in the near-term.
However, two factors could stimulate M&A.
The first is post-catastrophe loss price increases across the reinsurance market. Many companies are talking up the prospects of significant rate increases in the wake of 2017’s hurricane losses, although analysts are less convinced this will be a meaningful increase.
But should it be more meaningful and long-lasting, then CreditSights believes that this could perk up buyers interests in the space again.
The other factor that could stimulate M&A is any signs of distress, following the major catastrophe loss events.
Any reinsurers with a recognisable franchise that look in need of a capital injection, or seem to be facing distress in the wake of their losses, could find themselves the target of M&A.
Overall, in P&C insurance and reinsurance, CreditSights analysts are not anticipating any pick-up in M&A activity in 2018, unless either of the two factors come into play.
