PartnerRe-Covea bucks the trend as M&A wanes

M&A transactions in the global reinsurance sector will be limited into 2023 amid investor concerns over macroeconomic risks and heightened catastrophe losses linked to climate change, according to Fitch.

The rating agency expects reinsurers to prioritise pricing, risk management and organic growth rather than M&A as they contend with the implications of the economic slowdown, high inflation and volatile financial markets.

Even if the reinsurance market hardens enough for higher premium rates to generate significantly better profitability, it does not expect a wave of interest in acquiring reinsurers in the near term.

For traditional reinsurers, opportunities to increase pricing and improve profitability could develop if rising interest rates lead to lower supply of alternative capital to the reinsurance market, most of which is through insurance-linked securities.

Persistently low interest rates following the global financial crisis drew many new investors to the reinsurance market in search of better returns than were available from financial markets.

In more recent years, ILS investors have pulled back from the market following several years of above-average catastrophe losses. A continuation of this trend could help to extend the hardening market and would clearly be positive for traditional reinsurers’ profitability.

One large reinsurance transaction recently was the purchase of PartnerRe by Covea Cooperations, a French mutual insurer, from EXOR for a total cash consideration of $9.1 billion in July 2022.

Fitch views the deal as specific to Covea’s strategic objectives rather than a sign of more reinsurance M&A activity to come. 

AXIS indicative of M&A challenges

Recent events concerning Bermuda-based AXIS Capital demonstrate the challenges of reinsurance M&A. In April 2022, it was reported that AXIS was looking to sell its sizeable, but underperforming, reinsurance business after several years of repositioning the portfolio to reduce volatility and improve profitability.

The company eventually abandoned the sale in June due to limited market interest and instead decided to discontinue its property reinsurance business to significantly reduce its catastrophe exposure.

In a similar vein, in April 2022, AXA XL, part of French insurance group AXA, said that its reinsurance unit was not for sale. This followed persistent reports since 2021 of potential buyers looking to acquire it, with Covea among those thought to be interested. However, AXA XL has significantly reduced its property catastrophe exposure in recent months.

Also looking to reduce its reinsurance exposure, the French Ministry of Economics and Finance announced plans in May 2022 to sell a minority stake in CCR Re, the open market reinsurance arm of French state reinsurer CCR.

CCR Re was reorganised into a standalone company in 2016 to write open-market reinsurance business, including an international portfolio, and does not have a full government guarantee. The partial sale should also help CCR Re to expand and diversify its capital and premium base.