Reinsurers consolidating to remain viable: S&P

Market conditions have promoted mergers and acquisitions in the reinsurance sector, and such activity is likely to continue, S&P Global Inc. said in a report released Tuesday.

The new report, “You Must Be This Tall to Ride: Global Property Casualty Re/Insurers Seek Scale Through M&A to Remain Relevant,” however, says that activity will be at a measured paced due to high valuations and that all such mergers still have risks.

The extended soft market has made mergers and acquisitions “a viable option” to help ensure reinsurers “remain relevant,” S&P said in its report.

“The prolonged soft pricing environment — especially within the global property casualty reinsurance sector — multiple successive periods of insured catastrophe losses below historical averages, limited organic growth, and heightened competition in the market have been catalysts for recent M&A deals,” S&P said, adding “An abundance of low-cost capital has further driven transaction volume, with global reinsurance capital reaching a record $605 billion as of March 31, 2017, of which $86 billion is alternative capital, also an all-time high,” the report said.

The report said that the value of announced deals reached $22 billion during the past 18 months, compared to a “whopping” $70 billion in 2015.

The quest for growth must be tempered by prudent financial judgement, S&P warned.

“A persistent risk in any M&A transaction is the risk of overpaying,” S&P said, adding “Valuations in the industry remain elevated, likely due to the embedded takeover premium in the small to midsize carriers' stocks.”

As with any combination, there always remains risk associated with integration, S&P said.

“We continue to consider integration and execution as predominant risks associated with an acquisition,” S&P said in the report.