Hunt for profitable business to drive reinsurance M&A: A.M. Best

As reinsurance firms continue to shape their responses to the challenging and competitive market environment, searching for profitable business remains a key necessity and the desire for this relevance could drive more mergers & acquisitions, says A.M. Best.

While reinsurers have been reporting decent profits in recent quarters, they are becoming increasingly hard to find in the softened reinsurance market, as the effects of lower rates and higher competition make business increasingly challenging.

In fact the market is currently said to be on the edge of profitability, with the all too familiar commentary on the use of reserve releases and benefit of relatively benign catastrophe losses, across the market, perhaps the only thing keeping many companies in the black currently.

In a recent report rating agency A.M. Best notes that there is a growing hunt for profits and that re/insurers are working to maintain access to whatever business they have that is profitable.

“Maintaining access to profitable business is increasingly difficult and some insurers will need to expand their global footprint in order to remain competitive,” A.M. Best explains, continuing, “However, A.M. Best believes that the subsequent pressure on expense ratios will likely necessitate an increase in scale, achieved through either organic or acquisitive growth.”

This need for scale at reinsurance firms in order to maintain profits, through expansion and growth into global regions or into primary insurance markets, will come at a cost as well. The fastest way to get to profits in some new lines or regions may be through acquisition or M&A and as the pressure increases the desire to effect an M&A transaction could be heightened once again.

After the flurry of M&A seen in the last 18 months, things have been a little quieter of late. But A.M. Best and other rating agencies have all pointed to the responses made by reinsurers ending up increasing their costs, which necessitates the rapid scaling out of new operations in order to try to become profitable and M&A is a faster way to achieve this, if executed well.

The alternative routes to maintaining profitability is through having “superior niche access” to business, via strong and developed relationships with brokers, MGA’s and other suppliers, which for some “may be sufficient to maintain their competitive positions.”

Those companies that have “meaningful” insurance or reinsurance capacity to deploy across multiple lines of business, regions and clients, are likely to be the re/insurers that best placed to both negotiate with brokers or suppliers of risk and to compete with other sources of risk capital, including ILS specialists.

As a result, the M&A trend is unlikely to go away for some time, as pressure is really only now being more fully realised by some companies in the reinsurance market and it could be the year-end and Q1 2017 results where the slightly higher catastrophe loads seen in recent months may begin to show up in results.

Additionally, A.M. Best believes that the multiple balance-sheet business model is set to become increasingly important, saying that the “Flexibility to use different forms of capital to increase capacity will become more important as boundaries blur between traditional and alternative markets.”

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