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Acquisition prices deter insurers

High market valuations are curbing acquisition activity by insurers and reinsurers, despite the temptation to board the corporate deal “roller-coaster” to drive growth amid weak markets, according to S&P Global.

“Pricing pressures have curtailed the industry’s ability to generate organic growth, and we believe pockets of opportunity are quickly absorbed by early movers,” the ratings agency says in a report. “Companies have become increasingly inclined to seek growth through acquisition, a desire partially offset by rising stock market valuations of targets.”

S&P warns there is a risk of buyers suffering the “winners’ curse”, where the price paid exceeds the value on offer to the purchaser.

Announced deal values totalled $US22 billion ($27.6 billion) in the past 18 months, after jumping to $US70 billion ($87.9 billion) in 2015.

Deal activity was comparatively light at the start of this year after a string of acquisitions late last year, and S&P forecasts activity will remain slow for the remainder of the year due to high market valuations.

Global reinsurance capital reached a record $US605 billion ($759.6 billion) at March 31, including an all-time high $US86 billion ($108 billion) in alternative capital, while S&P says the potential for rapid premium growth is “questionable at best”.

“Without an unforeseen catalyst, it is unlikely conditions will improve significantly within the next 12 to 24 months, because the influx of capital continues and pricing pressures have yet to show signs of fully stabilising, let alone materially rebounding,” S&P says.

The ratings agency says overall it has a neutral view, with a slight negative bias, on mergers and acquisitions in the industry.

“As long as competitive pressure persist, (re)insurers will continue to consider purchasing their own ticket to ride the mergers and acquisitions roller-coaster, which has yet to derail.”

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