Fitch Ratings is expecting an increase in merger and acquisition (M&A) activity in the reinsurance sector over the next few years.
The rating agency said today that the reinsurance industry may see an increase in M&A activity due to several trends, including higher valuations, the inflow of alternative capital, and the growth of passive underwriting schemes.
Over the past several years, low valuations have made share repurchases more attractive than mergers, Fitch says. However, many companies’ market values have recently improved, it notes, which could give highly-valued firms greater flexibility to use their own stock for acquisitions.
And, for potential targets, Fitch says that higher valuations “make it more likely that existing shareholders will support any proposed purchase.”
Additionally, it says that the increasing availability of alternative sources of capital could bolster the pressure for consolidation by potentially reducing growth opportunities for traditional reinsurers. And, it suggests that passive underwriting schemes will put downward pressure on prices, which could increase the pressure on smaller firms to merge.
Fitch notes that there are still impediments to increased dealmaking, including softening pricing in many lines of business, significant integration risk, and regulatory uncertainty.
“Overall, we believe consolidation would be positive for credit profiles in the sector, as reducing the number of reinsurers and the associated underwriting capacity could help to lift prices, or at least limit their decline,” it says.