Increased funding ability, a combination of insurers seeking consolidation and the impact of Solvency II on capital requirements is likely to mean increased M&A activity in the global life market in 2015. This is the main takeaway of research and interviews with industry experts, explains Ronan McCaughey

Economic recovery in 2014 means that a wide range of deals coming to the market in 2015 stand a much better chance of concluding.

A recent report by Deloitte says Aviva’s proposed combination with Friends Life would be the largest insurance transaction in a number of years and illustrates not only the appetite, but also the higher levels of confidence to execute on large scale tie-ups.

The report says: "As with 2014, we see 2015 as being a year in which further transactions that are required to implement strategic change will occur and that the themes discussed will continue to drive transactions in 2015."

David Prowse, senior director at Fitch Ratings, says because of the lack of M&A activity, Fitch Ratings expects more to happen in the life insurance market in 2015.

Prowse says: "Among the reasons for this, there are a number of financial companies during the crisis that built up quite a strong capital position and there is an increased funding ability to do deals.

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Another factor contributing to possible increased M&A activity in the global life sector could be access to new capital says Prowse.
He says it seems that large insurers are able to issue debt relatively easily on reasonably good terms so they can raise finance should they wish to.

Regulation

According to Prowse, a key factor driving possible M&A activity is regulation and particularly Solvency II (SII).

He says: "Up until now, there has been a lot of uncertainty as to what exactly the capital requirements will be. But now, we are getting more and more clarity what those requirements will be."

That extra clarity will in some cases free companies up should they wish to proceed with M&A, says Prowse.
"As Solvency II requirements become clearer, we believe some of the smaller niche companies will struggle with either the capital requirements or the reporting burden."

Asked if there will be much M&A activity by life and health insurers in emerging markets, Prowse says there is certainly an attraction. "In the short-term I think it will be limited to the major players that have some sort of foothold."

Referring to Solvency II, the Deloitte report says companies have made clear plans for the implementation of SII and many companies are focusing on balance sheet optimisation.

Deloitte says this may take many forms, such as the disposal of capital intense, low-returning businesses or the acquisition of blocks of business to balance risks and increase diversification.

As for the outlook in EMEA’s insurance sector, a survey published in October 2014, which was conducted by Towers Watson and Mergermarket, cited more than 60% of respondents as saying they expected to divest operations before 2017, up from just 20% who said the equivalent the previous year.

The survey included senior executives from life, property and casualty and composite insurers as well as reinsurers.
Fergal O’Shea, EMEA Life Insurance M&A Leader for Towers Watson, comments: "The growing focus on disposals fits with a general strategy amongst major insurers in Europe in recent years of selling non-core units and of consolidating where they have a market-leading position.

"In addition, we expect more acquisitions of smaller insurers to result from the increased regulatory burden, mainly from Solvency II."

Respondents to the survey overwhelmingly indicated that they expect transaction activity to keep rising, with 84% predicting capital inflows into the EMEA insurance sector over the next three years and strong interest from financial buyers.

Of this group, over half said they saw private equity as the most important source of capital for insurance M&A in the next three years.

O’Shea notes that private equity investment in the EMEA insurance sector is already at its highest level for nine years.

"A combination of insurers seeking consolidation, low interest rates, the cash generative nature of insurance businesses and the revival of initial public offering (IPO) opportunities across many parts of Europe should heighten the appeal of insurance assets to private equity investors," says O’Shea.

 

US outlook

In the US life / annuity market, Stephen Irwin, vice president of Life & Health at A.M. Best, says the major drivers continue to be legacy books which are underperforming, ongoing low interest rates which make legacy blocks unattractive, regulatory challenges that are forcing some divestment among insurers in non-core lines and more recently over the last few years the introduction of private equity into the insurance space.

Irwin says A.M. Best has seen more activity on the mutual side as players look to deploy their capital through means other than organic growth while at the same time allowing counterparties to free up capital.

He says: "Currently, the longer-term market opportunity for block acquisitions for both life and annuity business is favourable.
"This is driven by the sheer number of US life insurance companies which have subscale businesses. In addition, the low interest rate environment is pressuring annuity returns and many smaller to medium sized companies are unable or unwilling to take on additional investment risk to earn an acceptable return. "

Irwin adds that global regulatory uncertainty has led some larger insurers to dispose of business segments seen as volatile or capital intensive.