New, stricter capital rules for Europe’s insurers could spur takeovers and consolidation next year among the region’s 5,000 insurers, after recent stress tests showed nearly one in seven would fail them, analysts and industry executives said.
The European Union’s Solvency II rules, due to take effect in January 2016, are aimed at improving the safety of products for consumers, and will require a complete overhaul of risk-management systems at insurance companies large and small.
They have already exposed weak capital safety buffers at some. Stress tests unveiled by EU insurance watchdog EIOPA this month showed that 14 percent of companies would fall short of a key solvency threshold if the rules had already been in force.
While EIOPA did not name the companies or their countries of origin, it did say that it was mainly smaller insurers that faced problems. The 14 percent represented only 3 percent of total assets of the insurers under review.
Merging with another insurer may provide a solution to companies where costs are high and capital is short.
“Solvency II has driven some M&A activity and this may well accelerate in the lead-up to implementation of the directive,” said Martin Membery, partner at law firm Sidley Austin in London, pointing out that merging could allow insurers to diversify the risks on their books, which secures better treatment under the new rules.
Companies may also try to achieve scale that would allow them to cut expenses relative to their expanded asset base, much as Aviva has done with its agreed $9 billion takeover of Friends Life in Britain.
Indeed, Britain has already seen the number of life insurers halve over the last decade, which could portend consolidation in other European markets, with insurers in France, Germany and the Netherlands seen as the most likely to contract.
Dealmaker Clive Cowdery, founder of the insurer that became Friends Life, sees Solvency II driving European insurers to offload books closed to new life insurance customers – to specialists who can run them more efficiently.
Rival British closed-life specialist Chesnara just bought assets of bankrupt Dutch financial services group DSB and sees Europe offering more opportunities than Britain.
“The UK has been consolidating for 10 to 15 years now, so we are probably part-way through that process, whereas in Holland … that process hasn’t really started,” said Chesnara’s chief executive, Graham Kettleborough.
ONE MORE CHALLENGE
The Solvency II rules are compounding challenges which European insurers, particularly life insurers, are facing from low interest rates and a moribund economy.
The results of the recent stress tests, analysts say, were seen as a wake-up call against that background of weak revenue.
“If you are the management of a company and know that you will have some issues in facing Solvency II, you will start looking now rather than later,” said Antonello Aquino, an associate managing director for insurance at credit rating agency Moody’s.
Companies with sub-par solvency ratios will weigh raising capital, issuing more debt and pursuing M&A, he said.
In Britain, smaller pensions specialists Rothesay Life, Just Retirement and Partnership Assurance are seen as offering merger or acquisition potential.
Rothesay Life executives said they were open to the idea of buying other companies, as they have in the past.
Just Retirement and Partnership Assurance declined to comment.
French mutual insurers are also discussing partnerships that would cut costs and share knowledge and capital.
“Insurers are being very focussed, exiting hobbyhorses or businesses where they do not have scale,” said Paul Traynor, international head of insurance at BNY Mellon.
“They will be both making acquisitions and divesting.” LONDON/FRANKFURT (Reuters
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