Re/insurance M&A generally positive, but won’t solve issues: Moody’s

by Artemis on April 8, 2015

Moody’s Investor Services has predicted a wave of further merger and acquisition (M&A) activity during 2015, driven by the increasing deterioration of the global reinsurance space.

The forecast comes from Moody’s latest quarterly newsletter, “Reinsurance Monitor,” which examines the development of the global reinsurance sector through several feature articles.

And given the large volume of M&A activity that has so far been announced/completed over the last 12 months, and with more expected, it’s no surprise that M&A is a running theme in Moody’s latest issue.

“The speed of the deterioration is tilting reinsurers’ ‘buy versus build’ decision toward M&A because they don’t have time to build new platforms from scratch. Hence, Moody’s believes that reinsurers will continue to consolidate in 2015,” said Kevin T. Lee, Vice President Senior Credit Officer at Moody’s.

Moody’s notes that in the last few months alone several high-profile merger deals have taken place in the market, including RenaissanceRe’s completed takeover of Platinum Underwriters, XL’s deal with Catlin Group and the merger of PartnerRe and AXIS Capital Holdings.

Not to mention the recent news that Endurance Specialty Holdings will acquire Montpelier Re for $1.83 billion, a deal which wasn’t announced until after Moody’s latest reinsurance newsletter had been published.

In light of deals which had already taken place and in anticipation of further transactions, ratings agencies, insurers, reinsurers, investment banks and alike have been discussing the M&A trend often, and more so since the start of 2015.

Standard and Poor’s warned that reinsurance M&A won’t ease softening or competitive pressure, while Fitch highlighted consolidations potential negative impact on the Lloyd’s market.

Deutsche Bank Securities expressed further caution warning that M&A in reinsurance is no panacea, covered at the time by Artemis.

And now come the views and predictions on the M&A trend from analysts at Moody’s Investor Services, which from an industry perspective, “generally view the consolidation as positive,” noted James Eck, Vice President Senior Credit Officer at Moody’s, although adding, “Though the effects on the companies involved are rarely straightforward.”

The main rationale for reinsurers to seek consolidation, according to Moody’s, is improved diversification and enhanced business franchise and scale.

Remaining relevant to clients and brokers coupled with increasing product offerings and a wider global reach builds a firm’s attractiveness and bolsters its portfolio.

And while Moody’s advises that M&A activity alone won’t bring the market out of its deterioration state, “it will allow firms to expand scale and diversification and provide more opportunities to improve profitability by eliminating redundant costs.”

So the reasons to seek consolidation are apparent and given the current market trend mostly justifiable, as companies look to avoid falling behind, running the risk of extinction.

Interestingly, and emphasising Moody’s view on the pace of the reinsurance environments deterioration, “just half of the reinsurers in Moody’s reinsurance cohort reported an improvement in profitability in 2014, despite fewer cat losses than in 2013,” explained Lee.

Again highlighted by the fact that since 2006, within the Moody’s reinsurance cohort, industry returns have been cut by nearly half.

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