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London market consolidation set to continue

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The drivers that have led to a spate of mergers and acquisitions in the London insurance market appear set to continue, according to a report by A.M. Best Co. Inc.

A need for insurers and reinsurers to increase lines size and gain access to advanced analytics is becoming increasingly important in the London subscription market, according to the report, “Drivers Behind London Market M&A Activity Set to Continue,” published Monday.

Recent M&A activity in the London market includes the planned acquisition of Catlin Group Ltd. by XL Group P.L.C. announced in January, and Endurance Speciality Holdings Ltd.'s failed hostile bid for Aspen Insurance Holdings Inc.

Drivers toward increased interest in M&A include the competitive pressures being faced by many insurers and reinsurers, Oldwick, New Jersey-based ratings agency A.M. Best said in the report.

Brokers increasingly are using smaller panels of reinsurance, and at the same time reinsurance rates and terms and conditions are coming under pressure from alternative sources of capital, Best said.

“The size of a company's balance sheet is increasingly being seen as a way to strengthen negotiating positions with the large brokers and companies may explore tie-ups to help consolidate competitive positions,” it said.

This is particularly the case for companies writing property reinsurance, the report said.

The soft market, particularly for reinsurance business, makes it hard for insurers and reinsurers to achieve profitable organic growth, according to the report, and may be another driver for M&A.

According to A.M. Best, the appeal of operating at Lloyd's of London, including access to its licenses in countries such as Brazil and China, continues to be a lure for investment.

“For international insurance groups looking to tap the benefits of operating at Lloyd's, the acquisition of an existing managing agent remains the most straightforward way to access the market, especially as a new syndicate business plan would be expected to face particularly robust scrutiny by Lloyd's in a soft market, the report said.

Acquisition of a Lloyd's company also can offer diversification benefits, the report noted.