Edmund Tirbutt investigates what is behind the current decline in merger and acquisition activity on the Continent, and looks at what the future could hold for deals
Shedding light on European merger and acquisition activity necessitates looking well beyond insurers, who are determined to keep their cards close to their chests in a highly sensitive area. Indeed, out of 20 insurers and reinsurers contacted by Post, only Markel International was prepared to make any comment.
Simon Wilson, director of international development at Markel International, says: “Buyers have found it easier to do deals in the US, UK and Bermuda. In comparison, entering Continental Europe presents a number of hurdles for M&A activity - such as different languages and legal systems - as well as higher levels of labour rights."
In general, Continental Europe is also much more nationalist about asset ownership: “When you’re looking at buying companies in Europe you have to weigh up whether the boost to balance sheets is worth the potential years of management time spent dealing with factors like work councils and labour law."
"In addition, Europe has a lot of mutual companies, which are particularly hard to buy as you have all the individual members to think about. It also falls heavily down to the fact that takeovers have always been less culturally acceptable in Europe,” he continues.
While there has been the odd headline-grabbing deal, such as Allianz’s purchase of Turkish property and casualty insurer Yapi Kredi Sigorta in March 2013, Wilson’s perspective certainly tallies with statistical data provided by industry analysts.
For example, Grant Thornton’s Global Insurance Mergers and Acquisitions report published this April reveals that Europe accounts for only 19% of global insurance deals as a whole – and that’s including life and pensions companies.
Peter Allen, partner and global head of insurance at Grant Thornton and one of the report’s authors says: “Compared with other regions like Asia Pacific and some parts of Latin America, it hasn’t been particularly spectacular. Insurance penetration responds positively to growth in GDP per head, but once GDP per head tops out so does insurance penetration.”
Research by AM Best focusing specifically on the property, casualty and reinsurance sectors shows Europe accounted for $2.6bon of worldwide M&A activity in 2013, compared with $3.9bn for North America and Bermuda and $4.5bn for Australia and Asia. This was in fact all part of a declining global trend, with 55 deals having been struck worldwide in 2013 - compared with 73 in 2012.
Stefan Holzberger, managing director analytics at A.M. Best, explains this could be down to the economic cycle, rather than any particular aversion towards M&A. He explains: “A lot of companies have moved forwards out of financial crisis and feel they have consolidated their businesses. If they have wanted to sell they have sold, so it’s back to business as usual.”
Possible pick up
Nevertheless, some experts are anticipating an upswing in European M&A activity during the short or medium term, and the implementation of Solvency II in January 2016 is invariably mentioned as a potential driver.
Insurers may dispose of parts of their portfolios to comply with capital requirements and, once in place, the regulations should benefit M&A activity by ensuring everything is valued on the same uniform basis – currently, bases of valuation can vary between EU states.
David Lambert, insurance transaction leader at EY, says: “Large insurers are making quite a lot of tactical changes to redirect capital in different directions, but Solvency II is only one of a range of factors that could drive consolidation as opposed to being the [sole] catalyst. If you combine the regulation with the fact that business models are changing very rapidly, it’s a collective trigger point.”
The ability of general insurers to offer both investment income and underwriting income to investors at a time when traditional investment returns are flat is also important. Adrian Williams, insurance advisory partner at lawyers DAC Beachcroft, says: “6% to 8% annual return on capital is quite feasible if you pick the right insurers in the right lines of business in Europe.
"Property and casualty hasn’t had big major losses recently and MGAs also represent an attractive business model as they are not required to put up regulatory capital for Solvency II.”
UK tops M&A charts
But Continental Europe is unlikely to rival the UK for M&A activity for the foreseeable future, thanks primarily to UK regulatory change and the attractions of Lloyd’s, which is highly valued for being well-capitalised and for its ability to provide a platform offering access to global markets.
Significant recent deals have included the acquisitions of Canopius Group by Somo Japan in December 2013 and of Torus Insurance Holdings - which has a Lloyd’s platform - by Enstar Group in July 2013.
The UK intermediary market also looks set for a sustained period of consolidation. David Coupe, partner at EC3/Legal, a corporate insurance lawyer specialising in the intermediary space, observes that he has seen more interest from private equity in the UK market than at any time during his 30 years in the industry.
He says: “Prices of intermediaries have started to rise, which actually brings sellers to the table and there are still more buyers than sellers. The acquisitions made by Towergate and Arthur J Gallagher over the last 18 months have made other intermediaries feel they should strategically be strengthening themselves.”
But Continental European insurers will at least be playing their part in extensive M&A activity in emerging markets, particularly in Latin America and the Far East.
Although business volumes that can be written in such areas are lower than in mature markets, acquisitive insurers can sometimes achieve double digit annual returns in these areas.
Recent deals include Swiss Re’s acquisition of a stake in FWD Holdings in Hong Kong in October 2013 and MAPFRE’s acquisition of a stake in ABDA in Indonesia in the same month. European insurers could also soon be making their mark even further afield.
Nicolas Michellod, senior analyst, insurance practice at Celent, says: “The Middle East will become quite an active area for all types of insurers wanting to invest in growing markets and there will even be acquisitions in Africa, although I only see this happening in South Africa and some North African countries.”
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