S&P: merger trend to go into 2016
A boom in mergers and buyups in the reinsurance industry is set to continue into next year.
Ratings agency Standard & Poor's said that companies would continue to combine to prow business and demands for greater scale from clients.
A report by Standard & Poor's said: “Because organic growth is hard to come by, mergers and acquisitions is a natural strategic option for top-line growth and excess capital deployment.”
It added: “Global reinsurers have seen the future and it requires greater scale and diversification for them to remain relevant.
“We expect reinsurance mergers and acquisitions momentum to continue for the rest of 2015 and into 2016 as the remaining small and midsize reinsurers race to find consolidation partners.”
The report said: “This trend confirms the challenges that global reinsurers' management teams face in the current soft market, including an ongoing downtrend in pricing and underwriting conditions exacerbated by an influx of third-party capital that poses an additional threat to traditional reinsurance players.
“Against this backdrop, reinsurers are increasingly seeking merger and acquisition transactions to alleviate some competitive market pressure and achieve profitable growth, cost savings and capital efficiencies.”
But the report added: “We believe that competitive pressures will remain elevated in reinsurance for the next 12 to 24 months and we don't see the recent spate of consolidation as a panacea to alleviate that burden.
“in fact we believe the trend towards greater scale highlights how hard it will be for management teams to defend their market positions.
“Few of these competitive pressures will abate as long as capital remains at or near all time highs.”
Standard & Poor's said that clients were increasingly looking for reinsurers that can offer large capacity access across national borders and with the expertise to write tailored products.
The report added: “We expect further consolidation in the market as smaller reinsurers are squeezed more than globally diversified groups and look to gain scale to compete. The industry is undergoing a reconfiguration that will result in fewer but larger reinsurers.
“The path to that result is strewn with challenges in executing and integrating new transactions, growing into new capital bases and competing against a different set of peers.
“Profitability and capital preservation will be difficult to achieve as pricing declines continue and investment yields are slow to rise.”
And the report predicted: “We foresee another competitive and difficult year for the reinsurance sector.
“It is unlikely that we will see profitability return to the strong levels of the past five years, that pricing will improve enough to turn the market across the board or that competition will subside.
“In the meantime, for reinsurers, there seems to be a Darwinian concept at work, as only those strong enough to adapt or evolve will survive.”
And Standard & Poor's said the business model pioneered by Warren Buffett's Berkshire Hathaway was being used by investment holding companies, which acquire insurers and reinsurers with strong capital flows that end up with the parent company for further investment.
It added: “The Berkshire Hathaway model is hard to duplicate and it is becoming a crowded trade in an already saturated reinsurance market.
“We expect more similar deals to come to the market during the next 12 months which will likely continue to put pressure on reinsurance pricing given these holding companies' lower cost of capital relative to stand-alone publicly traded reinsurers.”