M&A, Despite Market Risks, Will Continue at Slower Pace: S&P Prediction

August 1, 2017

Property/casualty insurers and reinsurers continue in 2017 to seek scale in a tough market through mergers and acquisitions. The pace has slowed considerably, however, and Standard & Poor’s sees the practice as risky and not a problem-solver for unfavorable market conditions.

“We believe that, barring a significant market-changing event, competitive pressures for the [insurance and reinsurance] industry are likely to persist over the next 12-24 months, Standard & Poors said in its report. “We do not think recent consolidation materially reduces the burden of current weak market conditions.”

Those conditions include rising capital levels that show no sign of letting up, S&P noted.

“Competitive pressures will be difficult to navigate as capital in the sector continues to climb, reaching record levels for multiple successive years,” the report noted.

S&P said that announced P/C industry M&A deal value hit $22 billion during the past 18 months in 2016 and 2017, versus $70 billion in 2015. The ratings agency noted that a series of acquisitions kept things robust in the second half of 2016, but slowed to a relatively light pace in the first half of 2017.

Standard & Poor’s said that “well executed” transactions can be of benefit, helping the combined company enhance its risk profile “through a strengthen competitive position that has extended market reach, improved diversification, and/or operational efficiencies.” A continued soft P/C reinsurance pricing cycle, excess capital, pricing pressures that curtail organic growth and a need to diversify are all valid M&A drivers as well, according to the S&P report.

A Cautious Attitude About Future M&A Activity

But S&P said it continues to have an “overall neutral view, with a slight negative bias, of insurance/reinsurance industry M&A due to existing and potential risk for both acquirer and M&A target.

“We continue to consider integration and execution as predominant risk associated with an acquisition,” S&P said. “These risks include operational continuity and effectiveness, retention of key staff and clients, managing business overlap and proper aggregation of key risk exposures on the newly consolidated entity’s balance sheet.”

What’s more however, is the reality of too much capital in the industry, and S&P said that M&A won’t solve the problem of too much capital, “which continues to achieve record levels.”

“M&A has the potential to improve [an insurer or reinsurer’s] competitive position and ultimately our opinion of its creditworthiness,” S&P wrote. “However, the [insurance/reinsurance] industry doesn’t have a great track record when it comes to M&A, at least from a credit standpoint.”

S&P said that the industry should continue to adapt to challenging market conditions, and mergers will likely continue, though they’ll be smaller in number and between larger insurers and reinsurers rather than smaller companies.

S&P’s conclusions are not unanimous in the industry. Conning, for example, issued a report in May that predicted insurance industry M&A activity will swell through 2017 in multiple areas, driven, in part by the infusion of foreign capital.

Among M&A deals announced or completed so far in 2017: Fairfax Financial Holdings Ltd.’s $4.9 billion deal to buy Allied World Assurance Co. Holdings, and Markel Corp.’s plan to acquire State National Companies for $919 million.

The full S&P report/market update is called “You Must Be This Tall to Ride: Global Property Casualty Re/Insurers Seek Scale Through M&A To Remain Relevant.”

Source: Standard & Poor’s