Expect more property/casualty insurance and reinsurance M&A deals in the months ahead — particularly among smaller carriers — as companies continue seeking scale and technology to improve capital returns, A.M. Best said.
“A.M. Best expects the drivers and market dynamics behind recent deals to remain and that consolidation will continue, particularly for smaller insurers, as it becomes increasingly difficult to achieve returns on capital,” the ratings agency wrote in a new market briefing.
Why are positive capital returns becoming harder to achieve? A.M. Best blames, in part, the increased use of technology in all areas of business that has built efficiencies and changed market dynamics. That trend, in turn, is forcing affected companies to look at acquisition targets in nontraditional areas as a way to expand.
“As retail business and the smaller end of the commercial market become increasingly commoditized, largely due to the increased use of technology, companies that have access to and the ability to underwrite more complex specialty business are proving attractive,” A.M. Best said.
Beyond that, however, data and analytics is becoming more commonplace and necessary in the insurance industry, and companies that are adept at the technology are also catching the eyes of potential acquirers, according to the ratings agency. Also, companies with strong management teams, diversifying portfolios, “associated capital efficiencies,” and access to business and technology are desirable acquisition targets.
Much of the M&A transactions have followed these criteria this year, A.M. Best said, noting deals such as AIG’s plan to buy Validus Holdings, AXA’s expected acquisition of XL Group and SoftBank’s proposed minority stake investment in Swiss Re. Many companies have also sold or been looking to sell their Lloyd’s operations, such Sompo Holdings’ deal to sell Canopius AG to a private equity consortium and The Hanover, which may sell its Chaucer arm.
In these cases, A.M. Best noted the deals were driven by a “perceived need to build scale and relevance — particularly in the reinsurance sector, which remains under pressure from alternative capital.”
Source: A.M. Best