In a recent report Standard & Poor’s Ratings Services said it anticipated further mergers and acquisitions in the global reinsurance industry. The report – “Reinsurers’ Shopping
Spree Won’t Slow Down Falling Rates” – cited the following facts to bolster its conclusion:
• The soft market remains as pricing during the January renewals continued its declining trend, and terms and conditions are showing signs of further widening.
• A string of mergers and acquisitions (M&A) announcements highlight the limited options that many reinsurers have in defending their market positions.
• Reinsurers’ risk-adjusted profitability will continue to underperform recent history as pricing keeps declining in almost all global lines, investment returns remain relatively low, and the benefit of reserve releases likely diminishes.
• Diversified product offerings, larger balance sheets, global scope, and expertise will continue to be differentiating factors for successful reinsurers.
S&P said “reinsurers have seen the future, and it requires greater scale. Already, some major proposed acquisitions or mergers have roiled the sector over the past few months. These confirm the challenges that management teams at global reinsurers face in the current soft market, marked by an ongoing downtrend in pricing and underwriting conditions combined with an influx of third-party capital that poses an additional threat to the traditional players in reinsurance.
The report also noted that S&P “believes competitive pressures will remain heightened in reinsurance, and we don’t expect the recent spate of consolidation will alleviate that burden. In fact, we believe this trend toward greater scale highlights how hard it will be for management teams to defend their market positions.
“As the remaining cast of reinsurers look to adapt their business models to fit the current market conditions, the newly merged reinsurance groups that fail to profitably use their new size and scale or others that fail to adequately defend their business positions could see their competitive position scores–and ultimately their ratings–deteriorate.”
As a cautionary note, S&P pointed out that under its policies: “Only a Rating Committee can determine a Credit Rating Action (including a Credit Rating change, affirmation or withdrawal, Rating Outlook change, or CreditWatch action). This commentary and its subject matter have not been the subject of Rating Committee action and should not be interpreted as a change to, or affirmation of, a Credit Rating or Rating Outlook.”
Source: Standard & Poor’s
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