Fitch Ratings says the reinsurance sector is likely to see increased merger and acquisition (M&A) activity, as more stressful market conditions limit organic growth potential, according to a newly-published report.
The increased availability of alternative reinsurance could add to an M&A trend by providing further sources of capital to the market while potentially reducing growth opportunities for traditional reinsurers in direct competition with the alternative providers. Many of these companies have seen their franchise value diminished in recent years as they are becoming marginalized in the face of increased capital market competition and could thus be viewed as prime acquisition targets.
Fitch views a certain amount of consolidation as a modest positive for the reinsurance sector, as a reduction in the number of (re)insurers and associated underwriting capacity would reduce undeployed capital and likely ease competitive pressures. For the acquirer, a consolidating transaction could be a credit positive or negative.
Endurance Specialty Holdings Ltd.'s failed unsolicited bid to buy Aspen Insurance Holdings Ltd. highlights that one of the largest impediments to reinsurer M&A in recent years has been a lack of willing sellers. It also reflects the stressful market conditions, with softening reinsurance pricing and broadening of policy terms and conditions resulting in a deteriorating profitability profile for the reinsurance sector. Becoming a larger and more diverse organisation can increase the chances of surviving the considerable industry headwinds.
Recognition of inherent uncertainty tied to any large acquisition also leads to fewer consummated deals. These risks include significant integration challenges, uncertainty in relation to regulatory initiatives, and potentially destroying shareholder value by overpaying for an acquisition, particularly with the heightened risk of acquiring a company with inadequate reserves. As such, Fitch expects very few transformational acquisitions.
Several recent acquisitions by reinsurance companies were driven by a desire to diversify from the reinsurance business. Fitch generally views such transactions as a credit negative to the acquiring company in the near term, as they carry a greater risk of failure, with the acquirer venturing into less known territory. Over the long term, a well-executed and well-priced acquisition that provides diversification of earnings and business profile would be a credit positive to the company.
The report, titled 'Alternative Reinsurance 2014 Market Update' is available on www.fitchratings.com
|
