Tough market conditions mean a wave of mergers and buy-ups in the reinsurance sector is set to continue, experts predict.

But Standard & Poor’s Global said activity will be at a “measured pace” because of high valuations, and that mergers still carried risks.

A report by the ratings agency added that soft pricing, and a prolonged period of insured catastrophe losses below historical averages, as well as limited growth and more competition in the market, had fuelled mergers and acquisitions.

“An abundance of low-cost capital has further driven transaction volume, with global reinsurance capital reaching a record $605 billion as of March 31, 2017, of which $86 billion is alternative capital, also an all-time high,” the report said.

The value of announced deals reached $22 billion in the past 18 months, compared to $70 billion for 2015.

Standard & Poor’s said that expansion had to be tempered by sensible financial judgment.

The report added: “A persistent risk in any mergers and acquisitions transaction is the risk of overpaying.

“Valuations in the industry remain elevated, likely due to the embedded takeover premium in the small to midsize carriers’ stocks.

“We continue to consider integration and execution as predominant risks associated with an acquisition.”

In a separate report, Gary Martucci, director of global insurance ratings at Standard & Poor’s, said that record second-quarter issuance in the insurance-linked securities market was a strong indicator that the sector would continue to grow,

Bonds outstanding at the end of the second quarter showed double-digit growth to $24.7 billion, an increase of more than 16 per cent year on year — a signal of confidence in the market as investors returned.

The report added that 2017 was expected to set a record for total property and casualty issuance — and said the traditionally slow third quarter would be followed by “a good number of deals” in the final quarter.

Among the deals in the second quarter were two of the largest catastrophe bond transactions — Everest Re Group’s $1.25 billion Kilimanjaro II Re and the California Earthquake Authority’s $925 million Ursa Re 2017-1.

Mr Martucci said: “When you are issuing these types of bonds, size matters.

“You can allocate the costs of setting up the issue, the underwriters, the risk modelling, over a much larger base, which from a buyer’s perspective can be attractive.”

He added: “When you look at the deals, a $300 million or $400 million deal is not unusual.”