24 May 2019

Commercial Risk Europe: Moody’s expects further insurance consolidation in Europe

Further consolidation is expected in the European insurance sector following a number of significant M&A deals in 2018, according to Moody’s Investors Service. Moody’s pointed to closed book deals on the life side, and restricted opportunities for organic growth on the P/C side.

Dominic Simpson, vice president, senior credit officer at Moody’s, said: “With organic growth difficult to achieve in saturated western European markets, we see insurers as wanting to achieve scale or transform their businesses through M&A.”

Moody’s said lack of organic growth is a catalyst for M&A: “Organic growth in many western European markets is constrained by already significant insurance penetration, intense competition, and subdued economic growth. We therefore see incentives for buyers to carry out incremental acquisitions to enhance their scale and market position, while also unlocking cost efficiencies. This will be facilitated by excess capital, with Solvency II ratios generally at healthy levels.”

The rating agency said the option of acquiring all or part of a competitor’s business can be attractive, as it can enhance the buyer’s scale and market position, unlocking cost-efficiencies. It added that in some cases, P&C insurers have chosen to buy new distribution channels rather than direct competitors.

Moody’s said companies continue to identify non-core operations that may be sold, while appetite to transform business models is growing. It noted that a number of insurers made transformative acquisitions in 2018, notably AXA through the purchase of non-life insurer XL. “We expect more transformative M&A as insurers accelerate efforts to change their business models, including through cross-sector transactions with asset managers and InsurTechs,” it said.

Buyer interest has been stimulated by relatively strong non-life underwriting profitability in most European countries. There is also a steady supply of assets for sale, as P&C insurers continue to identify certain operations, including capital-intensive long-tail legacy liability portfolios, as ‘non-core’, said Moody’s.

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