Europe’s big four might seek M&A in 2018

With the pressures on reinsurers unlikely to change over the next 12 months due to alternative capital providers putting ever more pressure on their underwriting performance, Fitch believes more mergers & acquisitions could be triggered in 2018.

Graham Coutts, EMEA head of reinsurance at Fitch Ratings, told Monte Carlo Today that deals could involve foreign entities buying into Bermuda as they seek to diversify and develop business outside their home regions and core markets. But he did not rule out one or more of the four major European reinsurers striking deals.

“Should this happen, we view smaller bolt-on purchases, that offer meaningful share in new markets or segments, as being more likely. Large transformational deals are unlikely given their already large scale and high level of diversification,” Coutts said.

Reinsurance rates are set to continue to decline in 2018 as growth in alternative forms of reinsurance intensifies the competition for business, Fitch previously stated.

Hurricane Harvey and other recent storms are likely to be one of the main talking points at Monte Carlo this year, although at this moment it is too early to fully assess the size of the impact on the re/insurance industry, Coutts noted.

The first half of 2017 was below average for cat losses, which he said should help the sector absorb hurricane-related losses in the second half of the year, but pricing will continue to decline in 2018.

Low investment yields and growth in competition from alternative capital providers in the sector continue to put further pressure on the underwriting performance of traditional reinsurers, according to Fitch.

“Over the last few years it has become increasingly difficult for reinsurers to write business at a profit margin that exceeds the cost of capital,” said Coutts.

“Since 2012, catastrophe losses have been below average which has helped reinsurers to produce operating profits.

“However, on a normalised basis, allowing for budgeted levels of major loss activity and reserve releases, in 2016 some reinsurers had combined ratios exceeding 100 percent. This means that if major loss experience and reserve development had been in line with budget, these reinsurers would have made underwriting losses.”

Operating profitability for reinsurers also remains under pressure, which he attributed to intense supply-side competition and the impact of historically low investment returns.

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