European insurance and reinsurance firms are turning to sharebacks and M&As to deploy high levels of excess capital one year after the Solvency II regime took effect, a Moody’s survey of 18 Chief Financial Officers (CFOs) from Europe’s largest multinationals revealed.
Last year just 10% of survey participants said they were looking into excess capital deployment – but that figure has now shot up to 40%.
Associate Managing Director at Moody’s, Antonello Aquino, commented that “with large European insurers reporting solid levels of capital one year after the Solvency II regime took effect, CFOs are turning their attention toward the deployment of excess capital.”
Low interest rates as well as European insurance and reinsurance firms having adjusted to the Solvency II operating environment are factors driving the industry to seek out alternative means of growing the bottom line.
M&As and share buybacks – the key options cited for insurers seeking to deploy excess capital – both had a 33% survey rating; increasing the dividend share ratio is considered to be the next best option with a 17% rating.
Moody analysts said examples of European insurance sector M&A in 2017 so far include “Zurich Insurance Company’s (rated Aa3 IFSR, stable) acquisition of Cover-More Group Limited for USD551 million (net of dividends) in April, and NN Group’s (Baa2 long-term issuer rating, stable) completion of its offer to acquire Dutch insurer Delta Lloyd NV for EUR2.5 billion .
“Separately, Standard Life Plc’s (Baa1, long-term issuer rating, stable) has announced a planned merger with Aberdeen Asset Management Plc3 , and Aegon N.V’s (A3 long-term issuer rating, negative) has acquired Cofunds for £ 140 million.”
“Some large insurers have also announced new share buyback programmes or extended existing ones. Aviva Plc (A1 IFSR, stable) announced in May that it will repurchase up to £ 300 million of its shares.
“In February, Allianz SE (rated Aa3 IFSR, stable) launched a programme to buy back up to EUR3 billion of its stock, subject to the company maintaining a sustainable Solvency II ratio above 160% .”
One third of survey respondents cited low-interest rates as the biggest challenge haunting re/insurers’ growth rates – a figure only slightly down from last year; “low rates remain the sector’s single biggest worry, as they force insurers to reinvest maturing assets at lower than historical rates of return,” Moody explained.
And 30% of respondents anticipate increased exposure to real estate, private placements, infrastructure and mortgages/loans, as Moody said the trend of insurers shifting gradually towards higher-yielding assets continues in response to low-interest rates.
This increased M&A appetite is expected to be felt both in domestic and emerging markets.
However, European firms seeking out M&As will be up against increased competition within the international insurance and reinsurance industry – rating agency Fitch recently highlighted the reinsurance trend of Merger and acquisition (M&A) activity not only growing in response to limited organic expansion options, but also as firms with reinsurance operations increasingly become the target of foreign companies seeking to move capital and operations into the international market.