13 April 2012

FT: Consolidation - There are few large deals on the horizon

Big underwriting losses, regulatory pressure and weak investment returns have caused a bout of mergers and acquisitions among smaller insurers – but analysts and bankers are unconvinced that there are many larger deals on the horizon.

In addition to the economic uncertainty that has kept M&A subdued in general, analysts say there are insurance-specific factors that make a spate of large transactions – other than forced or distressed sales – unlikely.

Insurers in the European Union are bracing themselves for the introduction of the Solvency II regulatory regime, the biggest ever regulatory shake-up in the sector, due to take effect from 2014. It has wide-ranging implications for capital requirements, corporate governance and data management. The regulatory changes may be encouraging smaller companies in the sector to consolidate, but some analysts say uncertainty is putting larger companies off deals.

Although huge deals have been almost non-existent, the data show there were 723 M&A transactions in the insurance sector last year, with a total value of about $67.6 billion, accounting for more than a quarter of the financial services total of $250.6 billion. The deal value total was down 48 per cent from 2007 highs, although activity held up better than in the broader financial services industry, which was down 65 per cent. Some large transactions seem fairly certain, because of restructuring of the financial services industry driven by regulatory changes after the economic crisis.

Although most big insurers remain generally well capitalised, some with extensive operations and investments in the eurozone have run into financial difficulties and are looking to sell “non-core” assets.

On the life insurance side, some consolidation is being driven by “closed fund consolidators” such as Resolution, set up by insurance entrepreneur, Clive Cowdery. A closed fund manages sets of existing policies that are no longer open to new business. Resolution, which has acquired Friends Provident, Axa’s UK life operations and Bupa’s life and health business, said last month it believed “value can be created from further consolidation” and was looking at more deals.

On the non-life side, the Lloyd’s of London market has long been regarded as ripe for consolidation. The Hardy sale was preceded by that of Chaucer, which last year accepted a cash takeover bid from The Hanover. The year before, Brit Insurance agreed to a private equity takeover by Apollo and CVC. Analysts expect to see more such transactions, as profitability comes under pressure from depressed premium levels.

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