“The losers from this spate of takeover deals are likely to be the smaller [insurers/reinsurers] and brokers, especially those that are unable to demonstrate particular expertise,” the report noted. “Smaller reinsurers will continue to struggle as dominant companies can have more influence on terms and conditions or can steer business towards an affiliate.”
A.M. Best added it sees policyholders also at a possible disadvantage, “theoretically” ending up with less choice from an insurance provider. At the same time, however, the ratings entity suggested policyholders may also benefit, because a stronger, financially sound carrier with expanded products and sophisticated underwriting could offer greater security.
Either way A.M. Best said conditions remain fertile enough to promote more mergers and reinsurers in the months ahead.
“A.M. Best 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 ratings entity said.
This trend will continue, according to the report, as insurers/reinsurers increasingly seek ways to deploy their capital and build scale in the face of ongoing soft market conditions and weak investment returns.
Over the last 15 months, as A.M. Best pointed out, at least 14 mergers and acquisitions have either been announced or completed between companies such as Validus/Western World, RenaissanceRe/Platinum Underwriters Holdings, XL Group/Catlin Group, and ACE Ltd./Chubb.
While industry consolidation “can be a positive step” to help improve risk-adjusted capitalization, boost competitive positions and reduce regulatory cost burdens, A.M. Best said that there can also be “significant risks associated with the deals and the operational consolidation that will be required to realize expected efficiencies.”
A.M. Best cites a number of factors that continue to drive M&A activity, including:
- Continued pressure on rates and terms and condition in the reinsurance sector
- Well-capitalized primary insurers retaining more risk on their balance sheets
- Well-capitalized insurers and reinsurers buying back shares, boosting dividends and paying special dividends.
- Specialist property/casualty insurers/reinsurers who may explore mergers to help use additional capital to consolidate competitive positions and grow in new areas/locations.
- The desire to reduce expenses and boost cost efficiencies.
- Low interest rates enabling cheap borrowing to financial deals.
The full report is called “Insurance and Reinsurance Market Conditions Set the Scene for Further Takeover Activity.”
Source: A.M. Best Co.