It is early in 2015 and we’ve already seen a few major reinsurance M&A deals. Expect that trend to continue in earnest through the year as the market responds to some new realities, A.M. Best said in its latest industry briefing.

The ratings entity is the latest industry observer to predict more reinsurance consolidation around the world, “particularly as competition intensifies and returns continue to decline.”

Separately, Standard & Poor’s concluded in a recent report that mergers won’t adequately address falling prices and other competitive pressures.

Underscoring what is at stake, A.M. Best noted that some companies are booking business in mid-to-single digit returns on equity, with the belief that the industry will see “even lower returns going forward” without consolidation.

“Companies with limited market reach and fewer lines of business are more likely to seek potential merger partners as expected weaker market conditions continue to develop over the next few quarters,” A.M. Best said.

What is driving these deals, such as RenaissanceRe Holdings’ plans to buy Platinum Underwritings Holdings for $1.9 billion? The answer, A.M. Best said, is a belief in a highly competitive market of the need to counter pricing declines with more global scale, diversified product lines and distribution. Creating economies of scale could also save money, some companies have said. The jury is out, however, as to whether that will actually happen, according to A.M. Best.

“Whether these expense savings actually materialize is yet to be seen but out there in the market it is getting more attention,” A.M. Best said.

“Monoline companies are companies that are focused solely on reinsurance or predominantly property catastrophe solutions will likely be a thing of the past and are probably under the greatest pressure,” the Best report added.

A.M. Best said it believes that companies “with well-diversified businesses” and a global presence will see most of the deals in the future. Companies that have limited books of business or a lesser geographic presence may struggle, it said.

Those players “may feel like they have to ride this pricing cycle down and hope they’ll be in a position to later ride it back up …Companies understand that their market environment is changing and they will need to adapt to the new reality, ” the briefing added.

Source: A.M. Best