Despite the number of merger and acquisition M&A deals seen between European life and non-life insurers having fallen in 2016, A.M. Best believes that a trend of consolidation is set to continue for the sector.
The rating agencies view of consolidation is that; “M&A is not, in itself, good or bad. Rather, it is a powerful tool for change in the hands of management, which can significantly advantage (or disadvantage) an insurer.”
M&A reached a high in European insurance across 2014 and 2015, but then subsided in 2016. Research from A.M. Best tracks M&A activity totaling USD 64 billion, covering transactions involving at least one European-headquartered insurer covering the 2012-2016 period.
The rating agency believes that the trend of greater consolidation seen in insurance and reinsurance markets is likely to continue, as appetite for growth and new revenue streams remains key.
Scale is perhaps not seen as such a driver as before though, which could be a more healthy M&A strategy in a market beset by pressures.
Anthony Silverman, senior financial analyst at A.M. Best, commented; “Insurers appear to have moved beyond seeking scale at a corporate level and consolidation is a theme of transactions, alongside utilising a large cash component to fund acquisitions – even for the biggest deals.
“Weaker operations in a corporate context have typically been sold to players with a stronger presence in the relevant market. Buyers have often sought to enhance profile and performance through cash acquisitions. In emerging markets, a perhaps natural presumption that European insurers’ M&A involvement is principally as buyers is not supported by the data. On the contrary, there is an equally significant proportion of transactions where European insurers were selling, to other developed market buyers and also to emerging market counterparties.”
Interestingly, A.M. Best sees the very high levels of London market M&A as a sign of cash-rich foreign buyers looking for diversification and other attractive features, rather than a reflection of a market under consolidation.
In fact A.M. Best says that large transactions in home market’s of acquisition targets are likely to become increasingly rare, as competition issues become more relevant.
Perhaps a reflection of the fact that as market’s do consolidate, the shrinking number of local players mean regulatory scrutiny can increase and make large deals in that market less likely going forwards.
Silverman continued; “M&A activity requires at least a credible view of the combined entity’s prospects after a transaction and this, in turn, is far more difficult to achieve when the economic outlook is unstable.
“One marker of unstable conditions is movements in interest rates – 2012 saw a pronounced fall in European interest rates from what were already low levels toward the unprecedentedly depressed rates that have persisted since then, with 2016 witnessing a move to negative interest rates in the region. While this move represented new and unfamiliar territory, other years in the period of the data set saw reasonably stable interest rates.”
