Headwinds including excess capacity will continue to challenge the reinsurance sector and drive consolidation, according to a report from S&P Global Ratings Inc.

In addition to excess reinsurance capacity, growth in alternative capital and the ongoing “commoditization” of property risk are also contributing to competitive pressure on reinsurers, S&P said in the report, released Wednesday.

Mergers and acquisitions are one of the strategies used by reinsurers to adapt to these pressures and remain competitive, the report said.

The first half of 2018 has seen an estimated total announced global insurance transaction volume of some $48 billion after a 2017 that saw an approximate total global insurance deal value of $125 billion, the report said.

Roughly $21 billion, or just under half, of this year’s deal volume has come from just two transactions: American International Group Inc.’s purchase of Validus Holdings Ltd. for $15.35 billion, and Axa S.A.’s acquisition of XL Group Ltd. for $5.56 billion, the report noted, adding both deals went at valuations of approximately 1.5 times price-to-book, “attractive valuations by any measure, though not as high as those observed when Asian buyers were willing to pay around 2x book value,” the report said.

Merger activity is expected to continue as pressures continue. “The reinsurance sector has been facing significant headwinds and weak business conditions for a number of years now, and we do not foresee a significant change in the underlying conditions,” the report said.

S&P noted, however, that the actual number of deals may decline on supply issues. “We could see fewer deals. The number of potential targets has shrunk and the era of cheap capital may, arguably, be coming to an end (at least in the U.S.),” the report said.

“Conditions are conducive to large deals, but small bolt-on transactions will remain in vogue,” the report said. “Small-to-midsize specialty carriers that have good underwriting books are appealing targets for players that seek growth and diversification.”

Deals could be both small and large, according to S&P.

Despite the ongoing consolidation, S&P said the reinsurance business is not expected to change substantially in the near term.

“Unless we see a market-changing event, we do not expect the recent consolidation to materially alter market dynamics over the next 12-24 months. The sector remains fairly fragmented,” the S&P report said.