More consolidation coming in life insurance sector, predicts Fitch
Consolidation may be making a comeback in the European life insurance sector driven by smaller deals as market conditions return to pre-pandemic level, predicts analysts at Fitch Ratings.
Chesnara’s recently announced acquisition of Sanlam Life & Pensions UK for £39 million is one of the first few deals in the European life insurance sector in 2021, but Fitch expects more transactions of a similar size, including further acquisitions of UK life insurers with stable or shrinking books.
The two largest European consolidators, Phoenix and Athora, have grown “dramatically”, it noted, and are now more likely to focus on larger targets to support growth.
“Although two large tie-ups were completed last year, which dominated the deal flow by the size of liabilities, we anticipate smaller deals to continue to make up the majority of transactions,” said Fitch.
According to the agency's latest report, conditions in the life insurance market are normalising, and the key structural trends observed pre-pandemic are still intact, including shrinking back-books, capital optimisation challenges, and a bifurcation of business models into ‘capital-light’ and ‘capital-intensive’.
It also highlighted that consolidators in the life sector are exposed to a number of additional risk factors compared to traditional insurers due to the nature of the business model, such as acquisition and integration risks, outsourcing-related risks and capital allocation risks.
Additionally, high barriers to entry in the life insurance industry supports in-sector consolidation, as do the differences in capital consumption profiles and the capabilities required by life insurers compared to conventional insurers.
“As regional life insurance markets achieve a sufficient level of consolidation, we eventually anticipate deals between key participants ('consolidation of consolidators'), especially due to the fact that many consolidators are privately owned. A possible exit strategy for those owners could be the sale to another consolidator,” it said.
Fitch explained that consolidation allows life insurers to respond to sector challenges including low interest rates, balance-sheet pressures and regulatory burdens, by releasing capital trapped in run-off books while alleviating cost inefficiencies associated with a patchwork of legacy administration systems.
The agency considers capital allocation to be the key long-term risk factor as successful life consolidators could make several substantial acquisitions over a ten-year period.
Did you get value from this story? Sign up to our free daily newsletters and get stories like this sent straight to your inbox.
