S&P Global Ratings has set its outlook for P&C re/insurance M&A as neutral with a slight negative bias, while re/insurers often see M&As as a viable growth option, the agency remains skeptical as to how effective this strategy of upscaling to offset market challenges really is.
As global property and casualty re/insurers continue to face industry headwinds they’ve turned to seeking scale to bring their size to match up to market challenges, but based on a conservative assessment of existing and potential M&A risks to both parties involved, S&P maintains a neutral to negative outlook.
“We do not think recent consolidation materially reduces the burden of current weak market conditions. Competitive pressures will be difficult to navigate as capital in the sector continues to climb, reaching record levels for multiple successive years,” said S&P in its latest market report on P&C re/insurers’ M&As.
However, well executed M&As still have their place in the industry, carrying potential to improve a re/insurers competitive profile, enhance market position through a bigger business risk profile with extended market reach, improved diversification, and potential for greater operational efficiency.
The rate of M&A activity has slowed this year, with deal value reaching $22 billion in the last 18 months, a stark drop from 2015’s $70 billion.
Heavy M&A activity in late 2016 led to a lighter start in the first half of 2017, S&P Global Ratings credit analyst Taoufik Gharib, commented; “Following a slow start to 2017, we expect re/insurance M&A to remain slow through the rest of the year, due in part to high market valuations.”
With these market conditions, S&P cautioned re/insurers over the risk of overpaying; “companies must remain cautious not to fall victim to the “winner’s curse” in which the price paid exceeds the intrinsic value to the buyer.
“Valuations in the industry remain elevated, likely due to the embedded takeover premium in the small to midsize carriers’ stocks.”
Looking ahead, the rating agency believes that the global property casualty reinsurance sector will continue to feel the squeeze of the prolonged soft pricing environment, with competitive pressures persisting over the next 1-2 years in the absence of a market-changing event.
P&C reinsurers have been beset by periods of insured catastrophe losses below historical averages, stifled options for organic growth and increased market competition as the alternative capital sector steadily grows to gain a greater share of the market space.
These factors will likely continue to drive M&A activity in future years and months, but reinsurers are advised to take a cautious approach in assessing potential risks and the long-term sustainability of transactions to ensure they aren’t turning to stop-gap solutions to plaster over their growing profitability challenges.
