The initial response of reinsurers to the soft market was to move further into primary lines, however, A.M. best highlighted that for most firms, results for primary business are around break even and lag far behind the reinsurance side, which still brings in the majority of profits.
With a return on equity of just 6.8%, A.M. Best said the Bermuda market is coming under the most pressure in the current soft market conditions, which continue to drive M&As.
Conditions pushing re/insurers to M&As include inexpensive borrowing rates, limited opportunities for organic growth, and companies struggling to cover the cost of capital.
The drivers for M&A transactions has shifted from gaining scale to build a broader market footprint to firms seeking “a home in a larger organization, where a company can have autonomy and be nimble but have some parental protection, as seen with the Endurance/ Sompo and Allied World/Fairfax acquisitions,” said A.M. Best.
M&A’s are expected to remain an important part of the reinsurance landscape in the next few years, these transactions can help to defend a firm’s market position, or provide greater stability for firm’s seeking a parent company, however, A.M. Best cautions “M&A is not a cure and has its own potential dangers.”
“Amid the considerable uncertainty as to the timing and what exactly it will 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,” said A.M. Best.
Following recent catastrophe events it will be interesting to see whether the balance between primary and reinsurance profits remains the same, or whether the gap becomes wider (due to rate rises) once the current losses are dealt with and paid.
