Fitch Ratings believes that merger and acquisition (M&A) activity may gather pace in the reinsurance sector after RenaissanceRe Holdings struck an agreement to acquire fellow Bermuda reinsurer Platinum Underwriters Holdings last month.

Fitch said in a commentary that the appeal of scale and diversification could drive consolidation in the current difficult market and that the RenRe-Platinum deal could be the spur.

“Reinsurance M&A has been limited recently due to a lack of willing sellers and inherent uncertainty tied to large acquisitions,” Fitch stated. “But Platinum’s limited market position in an increasingly competitive market influenced management’s decision to seek a buyer. This proposed transaction is not a blockbuster deal because PTP is a small reinsurer and has been shrinking its business considerably in recent years, but it may provoke a shift in market attitude to embrace more consolidation as a strategic option to combat the stress in the reinsurance market.”

Fitch said there was “no catalyst for a reversal in sight” for the soft market conditions that stem from record capitalisation among traditional reinsurers and burgeoning alternative capacity.

“The RNR-PTP deal is a combination of reinsurers, but many reinsurers are focused on diversification into primary markets, which could promote a broader variety of acquisitions.

“Achieving scale and increasing diversity through acquisitions can be beneficial because absolute capital size remains an important competitive factor in the reinsurance industry. Capital size is particularly meaningful for reinsurers, as the purpose of reinsurance is largely to absorb earnings volatility on behalf of clients.

“A larger reinsurance organisation also has an increased opportunity and a greater financial ability to lead reinsurance programmes and therefore be in a better position to evaluate and select risks, and negotiate pricing and terms and conditions.

“In the current competitive environment, stronger, more established reinsurers are maintaining capacity at the expense of smaller, weaker companies.

“A certain amount of consolidation would be a modest positive for the reinsurance sector, as a reduction in the number of reinsurers and associated underwriting capacity would be likely to ease competitive pressures.”