Mergers and acquisitions in the global reinsurance sector will be limited into 2023 amid investor concerns over macroeconomic risks and heightened catastrophe losses linked to climate change, according to Fitch Ratings.
“We expect reinsurers to prioritize pricing, risk management and organic growth rather than M&A as they contend with the implications of the economic slowdown, high inflation and volatile financial markets,” said Fitch in a commentary titled “Reinsurance M&A Stalls Amid Macroeconomic Risks, Volatile Claims.”
Even if the reinsurance market hardens enough for higher premium rates to generate significantly better profitability, Fitch does not expect a wave of interest in acquiring reinsurers in the near term.
For traditional reinsurers, opportunities to increase pricing and improve profitability could develop if rising interest rates lead to a lower supply of alternative capital to the reinsurance market, most of which is provided via insurance-linked securities (ILS), Fitch continued.
Persistently low interest rates following the global financial crisis drew many new investors to the reinsurance market in search of better returns than were available in the financial markets, the commentary explained.
“In more recent years, ILS investors have pulled back from the market following several years of above-average catastrophe losses. A continuation of this trend could help to extend the hardening market and would clearly be positive for traditional reinsurers’ profitability,” it said.
Fitch cited the example of one large reinsurance transaction — the July 2022 purchase of PartnerRe by Covéa Cooperations, a French mutual insurer, from EXOR for a total cash consideration of $9.1 billion.
Fitch upgraded PartnerRe’s Insurer Financial Strength rating to “AA-” (Very Strong) from “A+” (Strong) to reflect the ownership benefit under a group credit approach with Covéa, a larger property/casualty, health and life insurance organization.
Fitch viewed the new ownership as more strategic than that by EXOR, an investment company, explaining that the deal is specific to Covéa’s strategic objectives rather than a sign of more reinsurance M&A activity to come.
Covéa had been planning for several years to use its sizable cash position to enter the reinsurance market, said Fitch, pointing to an earlier deal in 2020 to acquire PartnerRe that was called off due to pandemic-related uncertainties, while the company also made a takeover bid for French reinsurer SCOR in 2018, which was rejected.
Recent events concerning Bermuda-based AXIS Capital demonstrate the challenges of reinsurance M&A. In April 2022, it was reported that AXIS was looking to sell its sizable, but underperforming, reinsurance business after several years of repositioning the portfolio to reduce volatility and improve profitability. The company eventually abandoned the sale in June due to limited market interest and instead decided to discontinue its property reinsurance business to significantly reduce its catastrophe exposure, said the Fitch commentary.
In a similar vein, in April 2022, AXA XL, part of French insurance group AXA, said that its reinsurance unit was not for sale, which followed persistent reports since 2021 of potential buyers looking to acquire it, with Covéa among those thought to be interested. However, AXA XL has significantly reduced its property-catastrophe exposure in recent months, Fitch confirmed.
Also looking to cut its reinsurance exposure, the French Ministry of Economics and Finance announced plans in May 2022 to sell a minority stake in CCR Re, the open market reinsurance arm of French state reinsurer CCR. CCR Re was reorganized into a standalone company in 2016 to write open-market reinsurance business, including an international portfolio, and does not have a full government guarantee, Fitch explained, noting that the partial sale should also help CCR Re to expand and diversify its capital and premium base.
Source: Fitch Ratings