Fitch: more dealmaking probable this year
American International Group's takeover of Bermudian reinsurer Validus Holdings could be a sign of further deals in the industry this year.
That is the view of Fitch Ratings, which says the effects of US tax reform and catastrophe losses last year is leading to speculation of more mergers and acquisitions among re/insurers in 2018 — especially in the Bermuda market.
Increasing scale and diversification resulting from mergers could increase the resilience of firms to market challenges, including intense price competition and low investment yields, Fitch said. However, merger execution and integration risks could pose risks to profitability.
“AIG's $5.6 billion acquisition of Validus, announced in January, could foreshadow additional re/insurer acquisitions for 2018,” Fitch stated.
Bloomberg News's reported this week that German insurer Allianz had interest in acquiring Bermudian firm XL Group, while Swiss Re confirmed that it was discussing a potential deal for SoftBank to invest a minority stake in the company.
Fitch added: “Notably, several recent deals have involved international firms buying into Bermuda or London, providing the benefit of growth outside home markets. The AIG-Validus acquisition is a case in point, with AIG gaining access to a Bermuda re/insurance operation and London platform.
“The sale of several typically smaller and less diversified re/insurers in recent years has largely been in response to a prolonged highly competitive market that has inhibited profitable capital deployment.”
Last year's catastrophe losses has exposed weakening reinsurance earnings fundamentals, while the growth of alternative capital in the reinsurance market helped limit price increases at the January 2018 renewals.
Fitch's global reinsurance sector outlook remains negative due to pricing concerns and constraining effects of low investment yields on profitability.
“In addition, recently enacted US tax reforms reduced the tax advantage that Bermuda and some other international re/insurers have over their US counterparts,” Fitch said.
“This may encourage firms to move more business to the US or enhance their geographic scope and competitive position through M&A.
“Conversely, opportunities for better revenue growth and rate adequacy could reduce sellers' interest in finding a merger partner. A near-term shift towards property re/insurance rate increases in response to 2017 catastrophe losses and pricing stabilisation in some other market segments will likely enable premium growth and modest underlying profit improvement in 2018. “Stronger global economic growth is also leading to expansion in insured exposures and demand for coverage.”