Global ratings agency Fitch is anticipating further consolidation across the reinsurance industry, driven by intense market competition and capital levels, alongside a lack of scale and diversification amongst smaller players.
Fitch explains that marginalised firms that are under increasing pressure in a highly competitive operating landscape are being pushed to explore mergers and acquisitions (M&A). This, combined with the U.S. tax reforms and the high level of catastrophe losses in 2017, is expected to result in more M&A activity in 2019, says Fitch.
For reinsurance companies, there are potential benefits of M&A, including revenue diversification, economies of scale, improved return on capital and an enhanced competitive position, all of which are becoming increasingly important in the current market landscape.
However, Fitch warns that acquirers in a competitive bid situation are at an increased risk of dilutive rather than accretive acquisitions, especially when assessing the reserve adequacy of a company as well as the potential complications in execution and integration.
Interestingly, Fitch notes that acquisitions that provide access to alternative reinsurance capital platforms have expanded “tremendously” in recent years, underlined by the recent acquisition of Nephila, the largest insurance and reinsurance-linked securities (ILS) fund manager in the world, by Markel Corporation.
Traditional insurers and reinsurers have increasingly looked to access alternative capital in recent times, and acquisitions of the likes of Nephila highlights the ongoing convergence of reinsurance and ILS.
Regarding larger M&A deals, Fitch notes that while these can be difficult to execute and justify on a cost-saving basis, such deals do show the trend of gaining scale and diversification in order to stay relevant.
A number of industry experts and analysts have suggested that further consolidation will take place in the reinsurance industry over the next year or so, and it will be interesting to see what avenue acquirers go down as they search for relevance in a very challenging and competitive market.
