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Agency expects more mergers and acquisitions

Year ahead: while market conditions appear to be stabilising, AM Best believes there will be more mergers and takeovers in the reinsurance sector this year

The trend towards mergers and takeovers is set to continue, predict experts at ratings agency AM Best.

“While current markets conditions appear to be stabilising, competition remains intense and quality of earnings under pressure,” the agency said in a report.

“This is sustaining the need for further mergers and acquisitions and AM Best believes that consolidation will continue, particularly among smaller players in the market as acceptable returns become increasingly harder to achieve.

“This is also fuelling reinsurers’ charge to innovate.

“It is extremely difficult to build a better mouse trap, but that should not hinder the search for niche businesses or strategies that are difficult to replicate and therefore prove more stable over time.”

The report, a look back at 2016 and preview for this year, said that reinsurers had made several strategic moves to ensure their survival.

But it added: “Merger and acquisitions activity is by far the most significant of these, but we have also seen formation of joint ventures, increased research and development to find ways to close the insurance gap, use of big data in underwriting and entry into new data-rich classes of insurance.”

The report warned that conditions in the market dictated that underwriting would have to become a larger contributor to profits and returns, leading to a more cautious risk selection, more diversification of product offerings, a wider geographic reach and conservative loss picks.

“That, combined with the ability to take advantage of the new ‘cheaper’ capital coming into the market from investors and that do not have the reinsurance and underwriting expertise could actually lead to significant success for some, although not everyone will win in the end,” noted the report.

“The solid players will be those that have been conservative in underwriting and reserving, have been able to develop a book of business that will remain relevant for today’s market and allows for quick shifts in and out of lines of business depending on market conditions, as well as companies that have created expertise in managing third party capital to their own advantage and are capable of participating in the new era of consolidation without being left out of the game.”

The report acknowledged that the global reinsurance market still had reasonable results for 2016, helped by the lack of large US catastrophe losses, ongoing capital management strategies and continued overall favourable reserve releases.

It added: “Some observers believe that we may be nearing the bottom of the soft market as brokers are experiencing greater difficulty filling out underpriced programmes and demands for further concessions in terms diminish.

“Nonetheless, current accident year underwriting margins will remain pressured for the near term as rates remain at historical lows.”

The report added that third-party capital continued to “seek a larger piece of the pie” but that the speed of capital market capacity entering the market seems to have slowed compared to prior years and some collateralised markets have held capacity flat, unable to find suitable opportunities.

“In AM Best’s opinion, this is a healthy response to the current market environment.”