Fitch Ratings: intense competition and scale benefits fuel reinsurance M&A

Consolidation of the global reinsurance industry will continue, as intense market competition and capital levels drive M&A, while smaller players lacking scale and diversification confront further pressure in regard to growth and profitability, Fitch Ratings says.

Marginalized companies are increasingly incentivized to explore M&A, as they face the challenges of operating in a difficult market environment. These factors, coupled with the impact of US tax reforms and the record 2017 catastrophe losses, should support M&A activity for the sector up to 2019.

The potential benefits of consolidation for reinsurers include revenue diversification, economies of scale, improved return on capital and an enhanced competitive position. However, acquirers in a competitive bid situation run the increased risk of dilutive rather than accretive acquisitions, particularly when assessing the reserve adequacy of a target company and the potential complications in execution and efficient integration. Reinsurers are also focusing on cost efficiencies and expanding penetration in developing markets. Recent reinsurance acquisition multiples have ranged from 1.1x - 1.6x book value, with revenue multiples ranging from 0.7x - 1.9x.

Acquisitions providing alternative capital platforms in order to diversify revenue streams have grown tremendously in recent years. Aon Securities estimates that alternative capital deployment has increased by 10% from end-2017 to USD 98 billion at end-1H18, which is nearly double the USD 50 billion amount at end-2013. Markel's acquisition of Nephila (terms not disclosed) allows it to further expand into the more fee-based insurance-linked securities (ILS) sector, solidifying its position as the leading manager of ILS funds. It follows Markel's December 2015 purchase of CatCo, a retrocession and reinsurance investment specialist, demonstrating the further convergence of traditional (re)insurance and alternative capital market reinsurance.

Larger deals, while more difficult to justify on a cost-saving basis, highlight the trend of gaining scale and diversification to stay relevant in a competitive marketplace. AXA's sizeable acquisition of XL Group for USD 15.2 billion (1.5x book value) is expected to close by year-end. XL will become part of a very strong, larger multi-line organization in combination with AXA, the largest insurer in Europe by gross premiums written. This acquisition follows AIG's July 2018 purchase of Bermuda-based Validus for USD 5.4 billion (1.6x book value), providing AIG with a profitable reinsurance and Lloyd's market platform. Furthermore, both deals provide access to established alternative capital platforms that neither company has currently.

The acquisition of smaller, capital-constrained businesses is reflected in lower acquisition multiples. Apollo Funds' USD 2.6 billion acquisition of Aspen Insurance (1.1x book value) reflects the distressed nature of its reinsurance business, and its outsized catastrophe losses in 2H17. Maiden Re was also being marginalized, which forced its break-up and sale to run-off specialist Enstar Group Limited for USD 308 million, with the renewal rights on this reinsurance business being sold to Transatlantic Re. This effectively puts Maiden Re out of business, as it will only serve as a captive reinsurer for AmTrust, which has been dealing with financial difficulties of its own.

Follow XPRIMM Publications on LinkedIn, for more data on the insurance and financial industry.

Share |

Related articles

March 2019 analysis on Brexit impact

A New Financial analysis found that 275 firms are moving or have already moved their businesses, staff and assets from Britain to the EU because of Brexit. The report shows Dublin, Luxembourg and Paris were the common choice, while Frankfurt was preferred by banks or investment banks.

2019-03-14

BI non-physical losses: the UK solution

With the Royal Assent being given to the Counter-Terrorism and Border Security Bill 2018 - allowing Pool Re to cover non-physical losses incurred following a terrorist attack -, the British market has set a precedent at global level, by finding solving a challenging issue born by the changed character of the terrorist attacks of the recent years.

2019-02-14

WEF's global Top 5 most concerning trends 2019: changing climate, cyber dependency and increasing social disparities and national sentiment

Rising geopolitical and geo-economic tensions are the most urgent risk in 2019, while environmental degradation is the long-term risk that defines our age, with four of the top five most impactful global risks in 2019 related to climate. Rapidly evolving cyber and technological threats are the most significant potential blind spots; we still do not fully appreciate the vulnerability of networked societies. These are some of the main conclusions of the World Economic Forum's Global Risks Report 2019.

2019-01-18

Global economic growth is solid but slowing, and emerging Asia will continue to power the insurance market, sigma says

Global premiums are forecast to grow by around 3% annually in 2019 and 2020, mostly driven by the high growth rates in emerging Asia which may be as by three times more than the global average. The economic power shift from west to east will drive insurance sector development to 2020 and beyond. Expanding the boundaries of insurability for corporate intangible assets will be another main growth area for insurers

2018-11-22

Insurance, a key player in building resilience

"The frequency of natural disasters is increasing, and the damage they cause will be greater as the world population becomes more urban and concentrated in areas prone to catastrophe," one of the latest analysis published by Aon under the Global Insurance Market Opportunities titles sates.

2018-11-05

ON THE MOVE

Bulgaria: Boiko ATANASSOV appointed as FSC's head

The Parliament of the Republic of Bulgaria appointed Boiko ATANASSOV as Chairperson of the Financial Supervision Commission (FSC) on March 15, with 134 votes in favour, none opposed or abstained.

21.03.2019

TOP EVENT

Climate and cyber: two Cs with catastrophic potential and the insurance business - under debate in Vienna, on April 9

10 years after its inception, the Romanian mandatory dwelling insurance system has progressed and PAID, the pool underwriting and managing the mandatory policies is a strong and financially sound institution. "We are currently managing a reinsurance program worth EUR 920 million, with a pool of excellent reinsurers, more than half of them rated AA+, while the company's solvency rate is of 220%," recently stated Nicoleta RADU, CEO, PAID.

21.03.2019

Conclusions: TBILISI - the first Georgian International Insurance Conference

The first Georgian International Insurance Conference took place on 14 March 2019. The event put under scrutiny the current status and the future development perspectives of the local market, in an attempt of identifying the main growth opportunities. The forthcoming launch of the mandatory MTPL system was the most important topic on the agenda, as this new line of business has the potential to provide for a significant growth, but also to become a market disruptor.

14.03.2019

See all