S&P Global Ratings On Global Reinsurance M&A

August 24, 2018

“Global reinsurers are having to review their long-term relevance in a tough market that features heightened competition, limited growth opportunities, and continued pressure on pricing,” S&P Global Ratings said.

The company said, “S&P Global Ratings does not anticipate any let-up in the key factors underlying the sector’s structural headwinds, which include excess reinsurance capacity, ongoing growth in alternative capital, the commoditization of property risk, and cedants’ changing behavior.

“To prepare for the task of rebalancing the reinsurer/broker/cedant relationships and further adapting to the convergence of reinsurance and the capital markets, reinsurers are using a multitude of strategies, of which M&A is just one.

“Following an active 2017 in which the approximate total global insurance deal value of $125 billion covered a mix of bolt-on and transformative acquisitions, 2018 started with a bang.

“For first-half 2018, the total announced global insurance estimated transaction volume was $48 billion, of which two sizable deals [American International Group Inc. acquiring Validus Holdings Ltd., and AXA SA acquiring XL Group Ltd.] contributed $21 billion. Both the deals valued the target entity at about 1.5x price-to-book, attractive valuations by any measure, though not as high as those observed when Asian buyers were willing to pay around 2x book value.

“Unless we see a market-changing event, we do not expect the recent consolidation to materially alter market dynamics over the next 12-24 months. The sector remains fairly fragmented. Despite high valuations and a potential increase in the cost of capital as interest rates move, capital remains relatively cheap.

“Therefore, we expect conditions to favor M&A and further consolidation for the next few years. The market has shifted slightly over time, boosting the power of brokers, the capital markets, and large cedants–if the sector can coalesce around some large players, it may perhaps regain its balance. Given that such a transformation could take many years, we anticipate that less diversified, nonspecialty reinsurers will continue to struggle in a consolidating market in the near term.

“A well-executed strategic deal that has a sound rationale can improve prospects for the combined entity through a stronger competitive position built on scale, product expertise, diversity, and profitability, all of which can help maintain or potentially strengthen the creditworthiness. That said, such deals carry risks for both the acquirer and the target that can’t be overlooked, especially given the industry’s mediocre track record. As such, we maintain an overall neutral view of reinsurance industry M&A, with a slight negative bias.”

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