Expect more reinsurance M&A deals in the coming months as reinsurers seek to remain competitive through tough market conditions, S&P Global Ratings predicts in a new report.

According to S&P, reinsurers continue to deal with robust competition, limited opportunities for growth and ongoing pricing pressure. Mergers and acquisitions can help improve the combined company’s competitive position, profitability and stability, according to the report.

“Many are resorting to M&A to build scale, acquire expertise and diversity,” Standard & Poor’s said, noting that merger and acquisition transaction volume for the 2018 first half hit $48 billion.

A little less than half of that number came from two deals: AXA Group’s $15.3 billion acquisition deal for XL Group and AIG’s $5.6 billion purchase of Validus Holdings. Both transactions accomplished scale, diversification and the addition of new services, and S&P said this trend will continue even though they are “no panacea for the sector’s woes.”

“We do not anticipate any letup in the key factors underlying the sector’s structural headwinds, which include excess reinsurance capacity, ongoing growth in alternative capital, the commoditization of property risk and cedants’ changing behavior,” S&P noted.

If nothing else, S&P said, M&A provides a coping mechanism as the industry headwinds continue with no letup in sight.

“M&A is just one of the strategies reinsurers are using to prepare for the task of rebalancing the reinsurer/broker/cedant relationship and further adapting to the convergence of reinsurance and the capital markets,” according to the report.

S&P said that the trend should continue over the next year or two, unless there is a market-changing event.

The full report is called “Bulking Up: The Global Reinsurance Sector Marches Toward Consolidation.”

Source: Standard & Poor’s