As global reinsurance executives gathered in Monte Carlo for their annual Reinsurance Rendezvous, Fitch Ratings said it expects consolidation of the industry will continue.
The firm said intense market competition and capital levels will continue to drive merger and acquisition (M&A) activity in the reinsurance sector while smaller players lacking scale and diversification will see further pressure on growth and profitability.
According to Fitch, marginalized companies are increasingly faced with the difficulty of operating in a difficult market environment to investigate M & A.
Firman’s analysts said that with the impact of US tax reforms and record losses in 2017, they wanted to support sectoral mergers and acquisitions until 2019.
According to Fitch, the potential benefits of consolidation for reinsurers include income diversity, scale economies, better return on capital and a more competitive position. However, in the case of a competitive offer, the acquirer increases the risk of extra dilution from additional acquisition, particularly in assessing the reserve adequacy of a target company and the potential complications and effective integration in practice.
Reinsurers also focus on cost effectiveness and penetration in emerging markets. The last reinsurance coefficient is 1.1x – 1.6x book value and the income coefficient is between 0.7x – 1.9x.
The gains that have provided alternative capital platforms to diversify revenue streams have increased dramatically in recent years. Aon Securities estimates that the implementation of alternative capital has increased by 10 percent since 2017, reaching 98 billion dollars at the end of the first half of this year, up 98 percent. Fitch analysts said Markel’s acquisition of Nephila has further expanded its presence in the insurance-linked securities (ILS) sector, which is more quarters-based, and strengthens its position as the leader of ILS funds. In December 2015, Markel bought CatCo, a bribery and reinsurance investment specialist, who shows that traditional (re) insurance and alternative capital market reinsurance are even closer.
Fitch underscored the tendency to scale and diversify to stay in a competitive market, even though greater opportunities are more difficult to justify on a cost-saving basis. It is expected that AXA will close the XL Group for $ 15.2 billion (1.5x book value) by the end of the year. XL will be part of a very strong, wider multi-line organization combined with AXA, Europe’s largest insurance company, with a gross premium written. This acquisition allowed AIG to purchase $ 5.4 billion (1.6x book value) of July 2018 Bermuda-based Validus. Thus AIG was profitable reinsurance and Lloyd’s market platform. What’s more, both agreements provide access to established alternative capital platforms that the company does not currently have.
Fitch said that the acquisition of smaller, capital-constrained businesses is reflected in the lower acquisition coefficients. Apollo Funds’ purchase of $ 2.6 billion Aspen Insurance (1.1x book value) reflects the distressing nature of the reinsurance business and its massive catastrophic losses in 2H17. Maiden Re was marginalized at the same time, which forced Enstar Group Limited, a sales record-breaking specialist, for $ 308 million, and that reinsurance firm Transatlantic Re. Fitch said that Maiden Re was active and that it would serve as a captive reinsurer for AmTrust, who only deals with his own financial troubles.
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