Large mergers and acquisitions (M&A) have recently occurred in the London insurance market, and private equity groups looking to sell stakes are expected to drive activity over the next year, according to AM Best.

“Last month XL Group cited the need to address the meaningful structural changes shaping the property and casualty sector as one of the reasons behind its planned purchase of Catlin Group, the largest managing agent at Lloyd’s… by gross written premium,” it says.

While M&A activity has tended to involve smaller London market players over the past few years, the XL deal stands out for its size, according to the ratings agency.

XL Group announced last month it will buy Catlin for $US2.79 billion ($3.63 billion). XL Catlin will become the eighth-largest reinsurer, up from 13th for XL and 19th for Catlin.

AM Best says brokers are establishing smaller panels of reinsurers with expertise in particular lines. Bigger balance sheets are seen as strengthening negotiating positions with large brokers, and companies may explore tie-ups to consolidate competitive positions, particularly in writing property insurance.

There have been a number of large deals in the specialty (re)insurance sector in recent months, AM Best says.

They include Renaissance Holdings’ $US1.9 billion ($2.47 billion) acquisition of Platinum Underwriters and a merger unveiled by Axis Capital and PartnerRe last month to create the world’s fifth-largest reinsurer, with a market value of $US11 billion ($14.34 billion).

“Given the soft market conditions, particularly for reinsurance, profitable organic growth is hard to achieve and insurers are more likely to turn to M&A,” AM Best says.

The trend of third-party capital establishing partnerships with London market insurers is expected to continue.

For international insurance groups seeking the benefits of operating in the Lloyd’s market, acquiring a current managing agent remains the most straightforward approach.

In the past five years the number of London-centric companies has dropped, in part as a result of M&A. The listed London market entities that remain tend to trade at a high price to net tangible assets, reducing their attractiveness as takeover targets, AM Best says.