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S&P Reports Re/Insurance M&A Activities Off to a "Light Start" in 2017

Black tiles spell out M&A against a woodgrain background
August 04, 2017

In a recent market intelligence summary of its research article "You Must Be this Tall To Ride: Global Property Casualty Re/Insurers Seek Scale through M&A To Remain Relevant," S&P reveals that, amid continued soft market conditions, global property and casualty re/insurers find themselves again riding "the merger and acquisition (M&A) rollercoaster through 2016 and into 2017." (The full article is available to subscribers only.)

S&P reports that declared M&A transaction values over the last 18 months reached $22 billion, compared to $80 billion for 2015. S&P states that "activity in the market was bolstered by a string of acquisitions in the second half of 2016, leading to a comparatively light start to 2017."

The S&P summary flags several factors behind continued M&A activity.

  • A prolonged soft pricing environment

  • Multiple and successive periods of insured catastrophe losses below historical averages

  • Limited organic growth and heightened competition in the market

  • An abundance of low-cost capital

Relative to capital, S&P further states that "global reinsurance capital reached a record $605 billion as of March 31, 2017, of which $86 billion is alternative capital (also an all-time high)."

While global property and casualty re/insurers continue to use the M&A alternative to achieve growth, S&P suggests that "M&A should not be seen as a panacea for unfavorable market conditions." Overall, S&P's view is "neutral with a slight negative bias on M&A in the re/insurance industry."

From S&P's perspective, "rapid premium growth at this point in the cycle as questionable at best. Re/insurers struggling to grow their top lines and maintain profitability in this environment may view M&A as a viable alternative, hoping to offset weak pricing conditions with cost and revenue synergies that offer cedents a larger, more diversified, rated balance sheet and a lower overall cost structure—generally viewed as a higher-quality counterparty."  

However, in seeking diversification through acquisition, as opposed to "acquisitions in which there is heavy overlap of business and synergies drive underlying value in the transaction, the industry has shown interest in buying companies that provide exposure to growing business lines with relatively attractive underwriting margins and less correlation with the balance of exposures on their book."

While S&P does not reject the M&A advantages to this industry, it states that "given the added risks involved in integrating separate books of business, infrastructure, systems, and cultures," S&P maintains "an initially conservative view of deals until the transaction has been able to season."

S&P finds that "the re/insurance M&A wave will continue to depend on market prices, with companies being cautious when measuring potential value in transactions." They conclude that "consolidation will not materially reduce industry capital, which continues to achieve record levels, as many transactions are motivated by a desire to achieve scale and remain relevant."

Check out this related Captive.com article: "Global Insurance Industry Mergers & Acquisitions Down 24% from 2015."

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