Reinsurance mergers and acquisitions slow due to macro risks and higher claims from natural catastrophes

Mergers and acquisitions in the global reinsurance industry will be limited through 2023 due to investor concerns about macroeconomic risks and rising losses from climate change-related catastrophes, according to Fitch Ratings.

“We expect reinsurers to prioritize pricing, risk management and organic growth over mergers and acquisitions as they grapple with the implications of the economic downturn, high inflation and financial market volatility,” Fitch said in a commentary titled “Reinsurance M&A Stall Amid Macro Risks, Volatile Claims.”

Even if the reinsurance market hardens enough that higher premium rates will generate significantly better profitability, Fitch does not expect a wave of interest in acquiring reinsurers in the short term.

For traditional reinsurers, opportunities to raise prices and improve profitability could develop if rising interest rates lead to a decline in the supply of alternative capital in the reinsurance market, most of which is provided through insurance-linked securities (ILS), Fitch continued.

Continued low interest rates in the wake of the global financial crisis have drawn many new investors to the reinsurance market in search of better returns than those available in financial markets, the commentary explains.

“In recent years, ILS investors have exited the market after several years of catastrophic above-average losses. A continuation of this trend could help extend market tightening and would be clearly positive for the profitability of traditional reinsurers,” he said.

Fitch cited the example of a large reinsurance transaction – the July 2022 purchase of PartnerRe by Covéa Cooperations, a French mutual insurer, from EXOR for a total cash consideration of $9.1 billion.

Fitch raised PartnerRe’s insurer’s financial strength rating from “A+” (very strong) to “AA-” (very strong) to reflect the ownership advantage under a group lending approach with Covéa, a larger non-life, health and life insurance organization.

Fitch viewed the new ownership as more strategic than that of EXOR, an investment company, explaining that the deal is specific to Covéa’s strategic objectives rather than a sign of more reinsurance M&A activity at come.

Covéa had been planning for several years to use its large cash position to enter the reinsurance market, Fitch said, pointing out that an earlier agreement in 2020 to acquire PartnerRe had been canceled due to pandemic uncertainties, while that the company has also made a takeover bid. for the French reinsurer SCOR in 2018, which was rejected.

Recent events with Bermuda-based AXIS Capital demonstrate the challenges of reinsurance mergers and acquisitions. In April 2022, it was reported that AXIS was looking to sell its large, but underperforming, reinsurance business after several years of portfolio repositioning to reduce volatility and improve profitability. The company ultimately abandoned the sale in June due to limited market interest and instead decided to wind down its property reinsurance business to significantly reduce its catastrophe exposure, Fitch’s comment said.

In a similar vein, in April 2022, AXA XL, part of French insurance group AXA, said its reinsurance unit was not for sale, following persistent reports since 2021 of potential buyers seeking to acquire it, with Covéa among those thought to be interested. However, AXA XL has significantly reduced its exposure to property catastrophes in recent months, Fitch confirmed.

Also seeking to reduce its exposure to reinsurance, the French Ministry of Economy and Finance announced in May 2022 its intention to sell a minority stake in CCR Re, the open market reinsurance arm of French public reinsurer CCR. CCR Re was reorganized into a standalone company in 2016 to underwrite open market reinsurance business, including an international portfolio, and does not have a full government guarantee, Fitch said, noting that the partial sale is also expected to help CCR Re to expand and diversify its activities. capital and premium base.

Source: Fitch Ratings

Mergers & Acquisitions Natural Disasters Reinsurance Claims

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