Merge and conquer: M&As in the insurance market

By Tom Reed | 18 January 2016

Moody’s recently reported that insurance related mergers and acquisitions (M&A) internationally had reached over £131 billion ($200 billion) – its highest level for years.

From the uncertainties in Europe and China to the ongoing geopolitical tensions, to the burden of increasing legislation, M&A in the industry remains on the cards for the next 12 months.

While there is no doubt that increased repulation has been a driver for M&A activity in the market, both insurers and intermediaries are increasingly focused on what delivers value to the company and are looking to get more out of their partnerships. M&A is becoming a progressively important element of strategic thinking to secure profitable growth, enter new markets and rationalise non-core operations.


Size matters in insurance and economies of scale have been key drivers for many high value deals this year such as the Ace/Chubb merger and Willis and Towers Watson. In more mature markets like Europe and North America, the priority for CEOs in the industry is releasing the dividends expected by shareholders, especially at a time when rates are highly competitive and margins are low, with enhanced regulatory capital requirements also needing to be met. Providers are struggling to offer a differentiated service that’s profitable and one of the remaining avenues to ensure growth is M&A.

The cost of increased regulation gives the appeal of scale a further boost and the UK’s regulators are unlikely to complain. Not only will consolidation bring about naturally stronger players with fewer overheads, by extension it should also enable insurers to offer better prices, a more diverse range of products and overall, better value to customers. Smaller firms and stand-alone insurance services are likely to put themselves forward for this equation; the alternative is to be drowned out by capital requirements and to be uncompetitive against more efficient market operators.


Gone are the days of sticking to core business segments; the insurance industry is diversifying to increase exposure across a range of different products and markets. Acquisitions across the entire chain have been common, demonstrated in particular by the partnership between XL and Catlin in January this year. The new brand, XL Catlin, is expected to evolve into the leading player in property and casualty and reinsurance markets - the announcement of the deal itself promoted a share price surge of 15%. Enhanced diversification also brings with it potential capital benefits under the Solvency II model which will enable shareholders to benefit from increased dividend yields.

It is not just insurers seeking to diversify. The potential merger between Willis and Towers Watson demonstrates that intermediaries and service providers to the insurance industry are also seeking fresh products and markets. Whilst not impacted by the requirements of Solvency II, the continued soft market has led to a need for expansion, in order that current profitability is firstly maintained and then enhanced.

Diversification in the insurance industry has become big business, bucking the global slowdown of M&As. By absorbing specialist offerings and smaller providers, larger acquirers are looking to free up capital and grow their profits. Whilst this will be traded off with exposing themselves to greater risks of a segment they are less familiar with, the potential for more cash is a key driver.

Solvency II

Regulation remains the obvious obstacle for the sector, especially in Europe, and consolidation seems to be a way out for a number of smaller firms. The capital pressures of Solvency II come into effect in January and this has been a key driver in M&A. Those invested in recession hit economies are still recovering and this will no doubt affect their ability to meet the significant capital now required to operate. Coming under the wing of a larger business has become an attractive option for many and this seems even more likely amongst European firms, as Solvency II will apply across the continent.

However, in some ways, Solvency II has created some uncertainty around capital models and what the future holds. Insurers may have opted to wait and see, pausing deal activity and causing the slow down in pre-deal conversations.

As we approach the ‘go live ‘date, there could be another surge of deal activity for companies that need more capital and for companies who continue to strive for greater diversification. In particular, it is likely that smaller mono-line insurers and run-off businesses will seek shelter from the gathering regulatory pressures by being acquired. 

Serious about growth

Companies that are serious about rapid growth know that this cannot happen organically and there must be a fundamental shift in how to address solvency and capital.

Much of the insurance M&A this year has been driven by financial performance. The continued pressures on pricing and the prolonged soft insurance market have rendered organic growth beyond most insurers. From exploring specialist segments and capitalizing on the growth in emerging markets, companies must be sure of their financing models and fully understand their new business to be able to follow through on the deal. There has also been an increase in the level of private equity investment in the markets, both through insurers and intermediaries. The relative safety of the insurance market and paucity of returns available from more traditional PE markets have led to significant investment over the past few years. Industry statistics (Thompson One Banker) indicate that there have been as many as 30 PE backed transactions in the last 2 years. 

Given the costs of consolidation and entering new markets, it is vital to ensure both the balance sheets can support an M&A and the cultures fit!

TOP TIPS: Do’s and Don’ts of acquisitions and mergers in the insurance market

• Do – ensure that Due Diligence focuses on cultural fit of the people and business being acquired
• Do – ensure that synergies are realistic and achievable, remember that 1+1 does not necessarily equal 3!
• Don’t –assume that bigger is necessarily better. There will always be a place for niche and speciality operators in the market, who often operate better alone.
• Don’t – acquire companies who are desperate for assistance – consider the impact on your capital models and ensure that any transaction boosts your solvency and capital efficiency. 

By Tom Reed, Director at Moore Stephens LLP.

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