Alternative Capital Could Fill Capacity Gaps Left By Reinsurance M&A: Fitch

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by: Steve Evans

In response to recent merger and acquisition (M&A) activity in the global reinsurance market and the potential for it to increase, Fitch Ratings has suggested that alternative reinsurance capital could expand and replace any lost capital.

After the recently announced takeover of Endurance Specialty Holdings by Sompo Japan Nipponkoa Insurance, for a reported $6.304 billion, M&A activity has again come to the forefront of discussions in the global reinsurance market.

International financial services ratings agency, Fitch Ratings, has said that the above deal, and the acquisition of Asia Capital Reinsurance by Shenzhen Qianhai Financial Holdings & Shenzhen Investment Holdings, suggests that the sector is ripe for further M&A activity.

Interestingly, the firm also notes the impact an increase in M&A could have on the reinsurance industry, as the merging of companies or acquisition of others, could see a significant amount of capital leave the market during the process, suggesting an opportunity for the ILS space to fill any capital shortages.

"The overall impact of increased M&A on the reinsurance sector will depend on how much capacity is removed from the market and whether alternative sources of reinsurance then expand to replace the lost capacity."

"Growth of alternative reinsurance has slowed in 2016, with reduced catastrophe bond issuance and limited formation of new hedge fund reinsurers," said Fitch.

Whether the two deals mentioned above spark a wave of M&A activity remains to be seen, and as highlighted by Fitch, the number of deals and nature of the transactions will contribute to the amount of capacity that could potentially leave the space.

Despite a slowdown in catastrophe bond issuance in 2016, the collateralized reinsurance marketplace continues to flourish and the alternative reinsurance marketplace does continue to grow overall, just at a slower pace than seen in the last few years.

Furthermore, it's been reported from a number of industry observers and experts that there's ample capital from third-party sources sat on the sidelines waiting to enter, and it could be that those sat outside the space view M&A activity and any resulting removal of capital as an opportunity to enter the sector, and fill any capacity voids.

The softening landscape remains and with losses remaining low, reserves reportedly thinning, interest rates staying low, and increased competition, it's possible that M&A activity picks up again in the coming months and into 2017.

"The reinsurers hit hardest by market weakness will likely be smaller, less diversified firms operating in markets where premiums have fallen to the point where they no longer cover the cost of capital. These firms may become acquisition targets as stresses leave them more likely to accept lower valuations," said Fitch.

Alternative reinsurance capital players are increasingly looking for opportunities to expand and further cement their place within the global reinsurance industry, and should there be any capacity gaps following any M&A activity, it's possible that the willing and able ILS space could fill the gap, and provided the needed capacity to the marketplace.

A similar notion was discussed earlier in the year when analysts said that any inflow of capital post-event was most likely to come from the capital markets than the traditional reinsurance space.

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