While mergers and acquisitions in the global reinsurance sector have accelerated in recent months, consolidation won’t adequately address falling prices and other competitive pressures, Standard & Poor’s concluded in a new report.

As a result, the ratings entity said it is maintaining a negative outlook on the global reinsurance sector, with the expectation that heavy competition and excess capital will perpetuate price declines in 2015 and 2016 much as was the case in 2014.

“When the dust settles from the consolidation land grab, fewer traditional players will be fighting for a seat at the table,” S&P analysts Dennis Sugrue and Taoufik Gharib note in their market update on the sector. “Nevertheless, competition will remain fierce as the new entrants in the top 10 look to grow into their enlarged capital bases, third-party capital continues to expand, and the members of the old guard keep trying to defend their long-standing positions.”

Standard & Poor’s makes its predictions in the wake of three major reinsurance-related M&A announcements in recent months: RenaissanceRe is acquiring Platinum, XL Group is snatching up Catlin and PartnerRe plans to grab AXIS.

While some see the acquisitions as smart responses to soft market conditions, the Standard & Poor’s report frames the reinsurance M&A trend as reflecting “how hard it will be for management teams to defend their market positions.”

“As the remaining cast of insurers 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,” the S&P report noted.

Why does S&P make this conclusion? There are a number of factors at play.

The report points out, for example, that January renewals reflect a continued soft market and declining pricing, with terms and conditions also “showing signs of further widening.” Standard & Poor’s sees reinsurance pricing continuing its downward trend in nearly every global line, with expectation that investment returns will stay low and that benefits from reserve releases will diminish in the months ahead.

Also, M&A announcements in the reinsurance space “highlight the limited options that many reinsurers have in defending their market positions,” the S&P report argued.

At the same time, the S&P report gives credit to reinsurers who have worked very carefully so far to withstand heavy pricing and competitive pressures.

“Reinsurers’ strong balance sheets with strong capital adequacy, a track record of robust earnings, and disciplined risk management and underwriting have largely enabled them to withstand much of the pricing pressure and competition seen to date,” the S&P report said. “Without this balance-sheet resilience and discipline, we would likely have already taking negative rating actions on some weaker reinsurers.”

But with expectations of at least another two years of downward pricing pressures, S&P said it might lead “to changes in our assessments of reinsurers’ competitive positions or capital and earnings.”

What’s more, the Standard & Poor’s report concluded that there will be an M&A “arms race for the remaining small and midsize reinsurers to find consolidation partners” in the face of continued hostile market conditions.

That, in turn, could lead the resulting larger companies to lower prices more than in the past, the S&P report said, as “they look to expand into new regions and deploy capital.”

Source: Standard & Poor’s