With mergers and acquisitions (M&A) expected to be the hallmark of another tough year for the global reinsurance industry, a report from AM Best warns one company’s survival strategy may be another’s sudden death.

The ratings agency says some companies refuse to consider merging and have not identified potential partners.

While some reinsurers will steer themselves through the current market turmoil, for others “not realising or accepting that the market is becoming more challenging and ignoring the need to find suitable alternatives to remain relevant… for customers, brokers and investors could turn into a less than ideal situation”.

A spate of recent acquisitions shows big players are rushing to grow even bigger, including: Renaissance Holdings’ $US1.9 billion ($2.4 billion) takeover of Platinum Underwriters; XL Group’s $US4.1 billion ($5.25 billion) acquisition of Catlin Group; Partner Re’s $11 billion ($14 billion) merger with Axis; and Fairfax Financial’s $US1.9 billion purchase of Brit.

As well as scale, AM Best says mergers bring diversified product lines and wider distribution networks.

“Monoline companies or companies focused solely on reinsurance or predominately property catastrophe solutions will likely be a thing of the past and are probably under the greatest pressure,” the report says.

“Reinsurers need to be able to manoeuvre through market cycles by having the ability to move in and out of various business classes and geographies as market conditions dictate.”

AM Best anticipates companies with diversified businesses and a global reach will account for most M&A activity this year.

In an overcrowded and weakening market, some big players may not have a choice.

“At the current stage of this cycle… companies, customers and investors alike are all aware something has to give [because] the challenges facing the reinsurance market are expected to stay in place for the foreseeable future.

“Add to that the abundant amount of capacity from third-party capital providers and today the market is flooded with record-breaking capital fighting for diminishing premiums.

“The need for M&A is becoming clearer, particularly for investors that are not seeing the investment returns they have become accustomed to from the reinsurance market players.” 

AM Best says companies with limited market reach and fewer business lines are more likely to seek potential merger partners as market conditions deteriorate.