Weak profitability is likely to leave more reinsurers worldwide vulnerable to takeover in 2017, reinvigorating M&A activity as healthier firms seek growth and efficiency savings, according to Fitch Ratings.
The ratings agency said consolidation in the sector has stalled after a flurry of deals in 2014 and 2015 as potential buyers have been put off by high valuations.
But the combination of overcapacity, which will continue to weigh on premiums, and worsening investment returns will reduce profits for many firms in 2017.
The worst-hit reinsurers are likely to be smaller, less diversified, and operating in markets where premiums have fallen to the point where they are barely covering the cost of capital. These firms may become acquisition targets as stresses leave them more likely to accept lower valuations.
Meanwhile, Fitch Ratings said organic growth will be hard to achieve due to the large surplus capacity in the market, including from alternative sources of reinsurance capital such as catastrophe bonds and collateralised reinsurers. This will leave acquisitions as the main source of growth for larger firms with still-healthy balance sheets.
The increasingly competitive market will also make firms keener to eke out benefits from efficiencies of scale, increased diversification, cost-cutting opportunities and more efficient capital management. All of these factors will contribute to the desire for acquisitions.
Fitch Ratings said: “We believe the weak market environment will create significant risks for M&A transactions despite the potential for greater efficiency and scale, particularly if valuations do not fall much.
“Risks are particularly high in transactions driven by a desire to diversify, as the buyer's lack of experience in the market it is entering makes mistakes more likely. Deals that combine two struggling companies in the same segment will have less execution risk but could offer very limited benefits.”
Life reinsurance pricing trends
Jules Constantinou, regional manager, UK and Ireland at Gen Re, says reinsurance pricing in life reinsurance is driven by local products and conditions.
He says: “Life reinsurance pricing in the UK has been tight for a long time. At some point in the future, we may see a bottom to that particular market.”
He adds that critical illness pricing is ripe for a change. “From our perspective, we believe the product is mis-priced now. Continuing advances in medical technology will cause deteriorations in the emerging experience, which are best dealt with now before the long term product guarantees become unsustainable going forward.”
Speaking to Life Insurance International from the Rendez-Vous Riviera life insurance conference in Nice, Julio Castelblanque, global chief underwriter for Mapfre Re, tells Life Insurance International that pricing in the life reinsurance market varies in different countries.
He says: “There are some counties in Europe where it is a very tough market for life reinsurance pricing.”
Discussing innovations in the life insurance market, Castelblanque says the underwriting process means a lot of client information is needed. However, he says: “automating the underwriting process and having more data means life reinsurance pricing can be reduced.”
Looking ahead, Castelblanque says underwriting technology is an investment for insurance players and in the short-term, he expects life reinsurance pricing to remain more or less stable.