Reinsurers continue to turn to M&As for the opportunity to diversify with some entities choosing to acquire service businesses outside of reinsurance, driven by low returns on reinsurance capital, according to Fitch’s 2017 mid-year financial results report.
The main strategy for offsetting sluggish market growth has continued to be M&As this year so far, although 2017 hasn’t yet seen sizeable reinsurance acquisitions Fitch expects some to emerge in the near term.
The most notable deals of recent years show reinsurers’ primary motives for M&As is opportunities to expand reach beyond their home region and core markets.
“Most recently this included Canada-based Fairfax Financial Holdings Limited’s July 2017 purchase of Bermuda (re)insurer Allied World Assurance Company Holdings Ltd. for USD4.9 billion (1.35x book value).
“Japanese non-life firm Sompo Holdings closed on its acquisition of Bermuda-domiciled Endurance Specialty Holdings Ltd. in March 2017 for USD6.3 billion (1.4x book value), with the entity rebranded as Sompo International,” said Fitch.
Examples of firms diversifying acquisitions to businesses outside of reinsurance includes AXIS’s planned $0.6 billion purchase of Lloyd’s of London re/insurer Novae Group anticipated to close by the end of 2017.
Fitch said; “Following this acquisition, AXIS will shift to a strong majority (61%) of business in insurance, from its more historically balanced split of reinsurance versus insurance mix of business. Beazley and Hiscox are now the only remaining independent Lloyd’s carriers.”
Markel announced its intention to acquire State National Companies (SNC), a specialty provider of Property & Casualty insurance, for $U.S. 0.9 billion and Validus Holdings acquired primary crop insurance managing general agent Crop Risk Services (CRS) from Archer Daniels Midland in May 2017 for $U.S. 0.1 billion.
In addition, Sirius International Insurance acquired two accident & health insurance managing general underwriters, International Medical Group in May 2017 and ArmadaCorp Capital, LLC in April 2017.
With no significant change to the increasingly competitive global reinsurance environment and a year of below average catastrophe losses so far meaning pricing pressure fails to be released, 2017 has seen a continuation of the trend of recent years for reinsurers to grow through acquisitions instead of organically.
The prevailing soft market conditions and the drive towards M&As places the competitive advantage in the hands of larger reinsurers with highly diversified business segments and greater purchasing power to move into new spaces.