2014 re/insurance M&A sees trend towards global diversification: A.M. Best

The first-half of 2014 saw global merger and acquisition (M&A) activity in the property/casualty (P/C) and reinsurance industries continue at a steady pace, according to A.M. Best, with a trend emerging towards M&A for global diversification purposes.

In the current market environment, where excess capital in reinsurance and the growing influence of alternative sources of reinsurance and insurance-linked securities (ILS) capacity are pressuring rates and increasing competition, one of the responses is to seek growth in new markets.

Targeting global diversification, as a way to avoid the sectors of the insurance and reinsurance market where competition has become a barrier to growth and pricing has declined to make business unattractive, is  a measured response for some larger players seeking ways to grow premiums and gain a foothold in regions where the influence of capital is not such an issue.

In the first-half of 2014 A.M. Best counted 35 P/C and reinsurance M&A deal announcements globally. The available disclosed amount for all deals was approximately $5.6 billion, the ratings specialist said, which is about half of the $10 billion announced for all of 2013.

As well as seeking growth in new markets, P&C and reinsurance M&A is currently being driven by a need to consolidate. This sees some firms offloading under-performing units in an effort to increase capital efficiency, a vital move when the cost-of-capital is becoming such a key issue in insurance and reinsurance underwriting.

Increased competition and lower insurance and reinsurance rates can force divestiture of non-core business lines, said A.M. Best. With organic growth a challenge the option to acquire is increasing in attractiveness for both insurers and reinsurers.

With growth in the core developed reinsurance markets, particularly the U.S. property catastrophe reinsurance market, challenging now it is no surprise that reinsurers are increasingly looking to consolidate their operations or to expand and diversify globally.

Southeast Asia remains a key region of focus, with the goal of increasing insurance penetration leading both primary insurers and global reinsurers to seek out a foothold in the region. It is to be hoped that these efforts see a sustainable approach to growing new, local markets, rather than the more typical attempt to dominate markets which are often poorly understood and implemented in re/insurance.

The drive to replace premiums lost or eroded in core markets with income from new markets could result in some mistakes. Entering new markets is not as easy as some believe and the costs to expand globally can, for some, outweigh the benefits. Thus, acquisition in emerging markets can provide a valuable local base with local market knowledge, which can help to make these ventures more sustainable.

With insurance premium growth expected to be strong in these emerging markets, the insurance and reinsurance markets will place an increasing focus on claiming a piece of these growing regions. The insurance-linked securities (ILS) market is equally targeting growth in these areas, particularly for peak catastrophe risks, so the pressure seen in core markets due to capital excess may well become an issue in emerging markets in years to come making the acquisition of a strong foothold in these areas now perhaps even more important.

In reinsurance the other area of M&A expected to be seen in the coming months is likely to be a focus on acquiring growth in established markets. With the reinsurance sector awash with capital many firms have large war chests to put to work in M&A deals.

Acquiring growth, followed by consolidation and rationalisation of operations and expenses, is one way to grow premiums while optimising the cost of underwriting capital and we could see some reinsurers pushed down this route in the next year or two if market conditions remain difficult.

In ILS and collateralized reinsurance, the need to grow and diversify is also likely to become more of an issue if catastrophe and reinsurance rates continue to remain under pressure. With return hurdles to meet and fees also pressured due to higher competition, we could see some merger and acquisition activity among the ILS manager community in the next few years as well.

Smaller ILS managers may find themselves increasingly under pressure in this way, particularly those focused on catastrophe bonds. The gradual maturation of vintage cat bond deals will see the overall return rates of the market decline, perhaps to levels where previously defined return targets become a challenge to maintain, making growth a necessity and M&A an attractive option.