European insurance M&A activity slows in 2016
European non-life and life insurers engaged in less merger and acquisition (M&A) activity in 2016 than in either of the preceding two years, according to AM Best.
In the European insurance sector, M&A subsided in 2016 after having reached high levels over 2014 and 2015, the ratings agency said in a report titled: “European Mergers and Acquisitions: Consolidation is the Trend.”
AM Best has investigated M&A activity totalling $64 billion, using a proprietary data set of transactions involving at least one European-headquartered insurer covering the 2012-2016 period.
“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,” said Anthony Silverman, senior financial analyst.
“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.”
AM Best has placed transactions into different categories, with “in-market consolidation” (when the acquisition is in the buyer’s home market) accounting for 25 percent of the total deal values from 2012 to 2016, while “cross-border developed market” (involving an insurer headquartered outside the territory of the subject assets) and acquisitions of “London market” participants, each represented 24 percent. “Emerging markets” and “run-off” acquisitions concerning legacy liabilities are 21 percent and 6 percent of transactions, respectively.
The research noted that 2012 and 2016 experienced relatively depressed levels of activity compared with other years in the period analysed. Silverman said: “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.”
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