Global re/insurers have turned to mergers and acquisitions (M&A) deals to remain relevant in the face of challenging market conditions, with total transaction volume reaching $48 billion during the first half of 2018, according to S&P Global Ratings, although the firm maintains a neutral view on this trend.
A recent report by the rating agency observed heightened competition, limited growth opportunities, and continued pressure on pricing in the global reinsurance sector over 1H18, with many companies resorting to M&A to build scale, acquire expertise, and diversify.
However, while S&P recognised that well-executed deals can improve the prospects of a combined entity, it also maintained an overall neutral view of reinsurance industry M&A due to the risks of such deals, and expressed a slight negative bias due to the industry’s mediocre track record.
Thus, while reinsurers have viewed consolidation as a viable option to keep activity levels up and broaden product suites, S&P does not expect this trend to alleviate the challenges that the sector faces.
Two sizable deals contributed $21 billion alone to the $48 billion H1 transaction volume total, as American International Group (AIG) acquired Validus Holdings for $5.56 billion and AXA SA acquired XL Group for $15.3 billion.
S&P noted that both deals valued the target entity at extremely high valuations of around 1.5x price-to-book, although not as high as those observed when Asian buyers were willing to pay around 2x book value.
Going forward, S&P said that it does not expect any let-up in the factors underlying the sector’s structural headwinds, which include excess reinsurance capacity, ongoing growth in alternative capital, the commoditisation of property risk, and cedants’ changing behaviour.
Despite high valuations and a potential increase in the cost of capital as interest rates move, capital remains relatively cheap, and conditions are therefore likely to continue to favour M&A and further consolidation for the next few years.
Additionally, the report stressed that M&A is just one of the strategies being used to rebalance the relationships between reinsurers, brokers, and cedents, as well as to futher adapt to the convergence of reinsurance and the capital markets.
Therefore, in the absence of a market-changing event, S&P does not expect recent consolidation trends to materially alter re/insurance market dynamics over the next two years.
