A.M. Best: Consolidation to continue

International ratings agency A.M. Best has predicted that the current consolidation trend in the insurance market is set to continue. This is due to the fact that the current drivers in the market that encourage this trend still remain.

In a report titled ‘M&A Drivers Set to Remain, Fuelling Further Insurance Deals’, A.M. Best has stated that drivers contributing to the recent M&A activity include the perceived need to build scale and relevance – particularly in the reinsurance sector, which remains under pressure from alternative capital. “The soft market conditions are making it difficult to generate strong underwriting returns, and the low interest rate environment is hindering companies’ ability to obtain acceptable yields from investment portfolios,” the report states. In particular, changing distribution practices have made companies with either data driven technology or a focus on less commoditised specialty business attractive.

Some insurers are taking advantage of relatively inexpensive borrowing to finance deals, while in other cases, M&A represents a means for cash rich buyers to deploy excess capital. A.M. Best notes private equity backed buyers are especially active as they have excess capital and fierce competition between these participants are driving price multiples higher.

A.M. Best affirms that this type of consolidation can be positive as it tends to enhance the position of the company in the insurance value chain, although there are obvious risks associated with execution.