Ratings agency Fitch has predicted that there is likely to be increased merger activity the reinsurance sector as firms bid to become larger to survive what it called significant headwinds in the industry.
Fitch said mergers and acquisitions could provide firms with further sources of capital, and concluded that some consolidation in the market could be positive for the reinsurance sector. A reduction in the number of (re)insurers and associated underwriting capacity would minimise un-deployed capital and ease competitive pressures in the sector, it stated.
Many companies have seen their franchise values diminished in recent years as they are becoming marginalised in the face of increased market competition, the firm added.
In July, Aspen Insurance Holding rejected a $3.2bn hostile bid from Endurance Speciality Holding, Fitch said this highlighted that one of the largest barriers to reinsurers M&A activity in recent years has been a lack of willing sellers.
The rating agency also said: 'It reflected the stressful 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.'
However, it also warned that the inherent uncertainty tied to any large acquisition could lead 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,' it said.
As such, Fitch expects very few transformational acquisitions. It noted that several recent acquisitions by reinsurance companies were driven by a desire to diversify from the reinsurance business.