Reinsurers' merger and acquisition (M&A) activity is still a hot topic, particularly because some players are posting subpar shareholder returns due to cost inefficiency, margin pressure, and still-excess capacity, says S&P Global Ratings.
Through the first half of this year, the deal value of M&A activity in the insurance world totalled more than $20bn. Whilst this is below the average of recent years (compared to same periods in prior years), S&P Global Ratings thinks this represents a temporary lull rather than the end of the M&A dance.
Continued challenging business conditions, coupled with cheap financing in the debt market, will continue to fuel M&A activity for the next few years. In particular, those competitors with a more narrow business profile or limited geographic footprint will likely either consider M&A or become targets themselves. Further, the ongoing convergence of the insurance, reinsurance, and insurance-linked securities markets through M&A will continue.
S&P Global Ratings does not expect consolidation among the top 10 reinsurers as they already account for about 70% of the total net reinsurance premium (about $210bn) emanating from the top 25 reinsurers. Furthermore, many of them have a material amount of direct insurance business. A merger among these reinsurers would bring not only significant execution risk, but also counterparty concentration risk for the cedants, and thereby could lead to a substantial overlap and the resulting loss of business for the consolidated group.