M&A transactions in the global reinsurance sector will be limited into 2023 amid investor concerns over macroeconomic risks and heightened catastrophe losses linked to climate change. Consolidation of the global reinsurance industry will continue, as intense market competition and capital levels drive mergers and acquisitions (M&A), while smaller players lacking scale and diversification see further pressure on growth and profitability.
Reinsurers to prioritise pricing, risk management and organic growth
Fitch Ratings expect reinsurers to prioritise pricing, risk management and organic growth rather than M&A as they contend with the implications of the economic slowdown, high inflation and volatile financial markets. Even if the reinsurance market hardens enough for higher premium rates to generate significantly better profitability, we do not expect a wave of interest in acquiring reinsurers in the near term.
For traditional reinsurers, opportunities to increase pricing and improve profitability could develop if rising interest rates lead to lower supply of alternative capital to the reinsurance market, most of which is through insurance-linked securities (ILS).
Persistently low interest rates following the global financial crisis drew many new investors to the reinsurance market in search of better returns than were available from financial markets. In more recent years, ILS investors have pulled back from the market following several years of above-average catastrophe losses. A continuation of this trend could help to extend the hardening market and would clearly be positive for traditional reinsurers’ profitability.
Acquisitions providing alternative capital
Marginalized companies are increasingly incentivized to explore M&A, as they face the challenges of operating in a difficult market environment. These factors, coupled with the impact of the US tax reforms and the record insured catastrophe losses, should support M&A activity for the sector.
The rating agency said potential benefits of consolidation for reinsurers include the following.
- Revenue diversification
- Economies of scale
- Improved return on capital
- Enhanced competitive position
However, acquirers in a competitive bid situation run the increased risk of dilutive rather than accretive acquisitions, particularly when assessing the reserve adequacy of a target company and the potential complications in execution and efficient integration. Reinsurers are also focusing on cost efficiencies and expanding penetration in developing markets. Recent reinsurance acquisition multiples have ranged from 1.1 times to 1.6 times the book value, with revenue multiples ranging from 0.7 times to 1.9 times (see Global Reinsurance Sector Outlook).
Over the past 15 years, the value of M&A transactions has grown in an up and down fashion. However, the amount of money involved continues to grow.
Acquisitions providing alternative capital platforms in order to diversify revenue streams have grown tremendously in recent years (see 11 Types of Merger & Acquisition).
Aon Securities estimates that alternative capital deployment has increased by 10% to $98 billion at the end of the first half of 2021, which is nearly double the $50 billion it was at the end of 2013.
Large reinsurance M&A transactions
One large reinsurance transaction recently was the purchase of PartnerRe by Covea Cooperations, a French mutual insurer, from EXOR for a total cash consideration of USD9.1 billion in July 2022. As a result, Fitch upgraded PartnerRe’s Insurer Financial Strength rating to ‘AA-’ (Very Strong) from ‘A+’ (Strong) to reflect the ownership benefit under a group credit approach with Covea, a larger property-casualty, health and life insurance organisation. Fitch viewed the new ownership as more strategic than that by EXOR, an investment company.
Fitch views the deal as specific to Covea’s strategic objectives rather than a sign of more reinsurance M&A activity to come. Covea had been planning to use its sizeable cash position to enter the reinsurance market, and an earlier deal in 2020 to acquire PartnerRe was called off due to pandemic-related uncertainties. The company also made a takeover bid for French reinsurer SCOR in 2018, which was rejected.
Recent events concerning Bermuda-based AXIS Capital demonstrate the challenges of reinsurance M&A. In April 2022, it was reported that AXIS was looking to sell its sizeable, but underperforming, reinsurance business after several years of repositioning the portfolio to reduce volatility and improve profitability. The company eventually abandoned the sale in June due to limited market interest and instead decided to discontinue its property reinsurance business to significantly reduce its catastrophe exposure (see 4 stages of M&A deals).
In a similar vein, in April 2022, AXA XL, part of French insurance group AXA, said that its reinsurance unit was not for sale. This followed persistent reports since 2021 of potential buyers looking to acquire it, with Covea among those thought to be interested. However, AXA XL has significantly reduced its property catastrophe exposure in recent months.
Reinsurance M&A Driven by Strong Competition & Benefits
Larger deals, while more difficult to justify on a cost-saving basis, highlight the trend of gaining scale and diversification in order to stay relevant in a competitive marketplace. AXA’s sizeable acquisition of XL Group for $15.2 billion (1.5 times the book value) is expected to close by year-end. XL will become part of a very strong, larger multi-line organization in combining with AXA, the largest insurer in Europe by gross premiums written.
This acquisition follows AIG’s July 2018 purchase of Bermuda-based Validus for $5.4 billion (1.6 times the book value), providing AIG with a profitable reinsurance and Lloyd’s market platform. Furthermore, both deals provide access to established alternative capital platforms that neither company has currently.
The acquisition of smaller, capital-constrained businesses is reflected in lower acquisition multiples.
Apollo Funds’ $2.6 billion acquisition of Aspen Insurance (1.1 times the book value) reflects the distressed nature of its reinsurance business and its outsized catastrophe losses in 2017. Maiden Re was also being marginalized, which forced its breakup and sale to run-off specialist Enstar Group Limited for $308 million, with the renewal rights on this reinsurance business being sold to Transatlantic Re. This effectively puts Maiden Re out of business, as it will only serve as a captive reinsurer for AmTrust, which has been dealing with financial difficulties of its own.
Also looking to reduce its reinsurance exposure, the French Ministry of Economics and Finance announced plans in May 2022 to sell a minority stake in CCR Re, the open market reinsurance arm of French state reinsurer CCR. CCR Re was reorganised into a standalone company in 2016 to write open-market reinsurance business, including an international portfolio, and does not have a full government guarantee. The partial sale should also help CCR Re to expand and diversify its capital and premium base.
Reinsurance: mergers and acquisitions
The rapprochement observed over the past few years among the various players in the insurance and reinsurance market is gathering momentum. The health crisis and the emergence of new systemic risks are at the origin of this renewed consolidation.
For the whole insurance and reinsurance market, no less than 640 mergers and acquisitions operations, worth 122.786 billion USD in total, have been reported for the first eight months of the year 2021.
The total value of these operations for the whole year 2020 amounts to 82.530 billion USD.
Main mergers and acquisitions operations between insurers, reinsurers and brokers
|Buyer||Target company||Date of the transaction||Amount of the transaction||Result of the operation|
|Sompo, Japan||Endurance, United States||2016||6.3 billion USD||Completed|
|AIG, United States||Validus, Bermuda||2018||5.6 billion USD||Completed|
|AXA, France||XL, Bermuda||2018||12 billion USD||Completed|
|Covéa, France||Scor, France||2018||9.65 billion USD||Failure of the operation|
|Covéa, France||PartnerRe, Bermuda||2020||9 billion USD||Failure of the operation|
|Arthur J. Gallagher, United States||Willis Re, United Kingdom||2021||3.25 billion USD||Ongoing|
|Brookfield Asset Management, Canada||American National Group, United States||2021||5 billion USD||Ongoing|
|Covéa, France||PartnerRe, Bermuda||2021||9 billion USD||Ongoing|
This interconnection between insurers and reinsurers is often the subject of much criticism because of:
- the unfair competition in the market: reinsurers can be considered as direct competitors of cedants.
- the greater advantage granted to some at the detriment of others since they share and process the same data.
These allegations are often disputed on the grounds that:
- insurance and reinsurance market players are using separate organizational models.
- reinsurers focus only on industrial and major risks where they make use of the necessary capabilities and technical expertise.
With 122.7 billion USD in the 2021, the peak of 122 billion USD in 2017 has been surpassed. Due to the health crisis and the global economic downturn, the 22 billion USD reached in 2019 is just a misstep.