As falling prices and rising capacity squeeze opportunities for profitable organic growth in the insurance industry, inorganic growth is moving into focus, with excess capital likely to be deployed into M&A, according to Berenberg.
In a new report, the firm highlighted the cyclical nature of the insurance sector, noting that it is currently in a phase of pricing declines, visible across several lines of business, including commercial lines, personal lines and reinsurance.
“This does not necessarily mean that earnings are contracting, as these pricing effects come into the P&L with a lag, and insurers in the meantime have reserves to use, can improve cost efficiencies and can, of course, grow their volumes to try to offset the pricing effects,” Berenberg explained.
Inorganic growth was reportedly one of Berenberg’s key takeaways from conversations with executives in January of this year, although, while the topic came up frequently, the focus was mainly on small bolt-on acquisitions rather than transformational deals.
“In every instance, our understanding is that any M&A should not interfere with and jeopardise the insurers’ existing capital distribution plans,” Berenberg added.
The firm’s report continued, “The potential consolidators in the European insurance space remain the major Japanese insurers, which have $40bn of firepower to reinvest by 2030, and the larger European insurers, in our view.
“With Zurich’s bid for Beazley, the attractiveness of the London Market assets came again into focus, highlighting the growth potential stemming from speciality insurance.
“Our understanding is that European insurers are mostly interested in bolt-on deals rather than transformational acquisitions. These bolt-ons include both listed and unlisted assets, as companies also seek to bolster their capabilities in specific areas.
“While Zurich’s bid for Beazley is large in absolute dollar terms, we would consider it more like a large bolt-on deal rather than a transformative one, as Zurich’s existing speciality business is 1.5x larger than Beazley’s total group premiums.”
Berenberg concluded, “We believe that, for many of the insurers in our coverage, their excess capital is likely to be used for inorganic growth and to support dividends in outer years, rather than being used for extraordinary distributions.
“As such, while the potential for capital distributions might be linked and limited to earnings growth, we would view this growth as secure and hence reiterate that one of the key appeals of owning stocks in the European insurance space is the attractive capital distributions.”
