M&As in European insurance poised for rebound

Moody's Investors Service expectss a rebound in mergers and acquisitions (M&A) for the European insurance sector after a period of market fragility that had pressured the volume of M&A during 2008-2009.
The rating agency observed that, in line with the trend in the rest of the European financial services industry, the European insurance sector recorded sharply lower M&A volume of EUR 23 bln in 2008 and 2009 combined, which is only half that of 2007. "However Moody's expects the sector to witness a wave of consolidation, against the background of a changing regulatory and competitive environment," said Antonello Aquino, author of a special report on the sector.
"In particular, the rebound in M&A volume in the European insurance sector will be driven by: (i) the evolving regulatory frameworks of Basel II and Solvency II, both set for full implementation in 2012; (ii) the quest for growth opportunities to offset the otherwise lacklustre organic growth outlook in many European markets; and (iii) the restructuring of some financial groups in order to meet EU competition rules," added Aquino.
Moody's added that the relative stabilisation of capital markets will provide scope for consolidation, noting that the management teams of major insurers, who had dedicated a considerable amount of time towards protecting companies' balance sheets from the volatility of capital markets, are now adjusting and preparing for a new competitive environment.
"Proof of this change was the announcement, at the beginning of March, of the largest-ever insurance M&A deal (US$ 35.5 bln) involving UK-based Prudential Plc and Hong Kong-based AIA Group," Aquino said.
Moody's also noted that consolidation in the European insurance industry may have different credit implications: this will depend on a series of factors including, among others, the rationale for the transaction, the funding mix and the risk in executing the deal.
"Generally, Moody's views M&A activity as a negative credit event over the short term due to the integration risk and capital impact associated with the transaction; nevertheless in the medium-to-long term we may hold a more positive view once the risks of execution have faded, capital is replenished and franchise is strengthened," Aquino concluded.