Industry consolidation to remain at the forefront of the management agenda
July 20, 2015 — LONDON–(BUSINESS WIRE)–Merger and takeover activity is likely to continue in the coming months as (re)insurers increasingly seek ways to deploy capital and create scale against a backdrop of ongoing soft market conditions and weak investment returns.
In a new Best’s Special Report, titled, “Insurance and Reinsurance Market Conditions Set the Scene for Further Takeover Activity,” A.M. Best states that it expects industry consolidation to remain at the forefront of the management agenda as companies attempt to drive cost efficiencies, diversify both geographically and by product and increase market share.
The low interest rate environment is also conducive to deal making, enabling cheaper borrowing to finance deals. “We see numerous drivers fueling M&A activity,” A.M. Best Group Vice President John Andre said. “In the reinsurance sector, a significant factor has been that rates and terms and conditions remain under pressure as a result of the recent period of benign loss activity and the influx of alternative capital. As competition is intensifying, operating margins are being squeezed. Additionally, primary companies are well-capitalised and retaining more risk on their balance sheets. Brokers are establishing smaller panels of reinsurers, with expertise and experience in particular lines of business, and the size of a company’s balance sheet is increasingly being seen as a way to strengthen negotiating positions with intermediaries."
Consolidation can be a positive step
Industry consolidation can be a positive step, with improvements in risk-adjusted capitalisation and competitive position as a result of a transaction potentially leading to positive ratings development. However, there are often significant execution risks associated with deals and the operational consolidation that will be required to realise expected efficiencies.
A.M. Best notes that trying to expand a niche to other territories or related classes of business quickly has been the downfall of many companies, resulting in significant downgrades and insolvencies – particularly following the last significant soft market from 1998-2002.
The report notes that the losers from this spate of takeover deals will likely be the smaller (re)insurers and brokers, especially those unable to demonstrate particular expertise.
Yvette Essen, director, research & communications, added: “A.M. Best expects that smaller reinsurers will continue to struggle as dominant companies can have more influence on terms and conditions or can steer business towards an affiliate. The policyholder theoretically will have less choice from an insurance provider, but at the same time can benefit from greater security through the purchase of protection from a stronger financially-sound entity with highly-refined underwriting ability and product offerings.”
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