Laura Miller examines a post-Covid trend among European insurers to sell off non-performing business lines
Europe’s insurers are emerging from the Covid-19 pandemic assessing the impact of the last 18 months. That is translating into a stronger appetite for mergers, acquisitions and disposals, as they seek to repair financial damage done by the coronavirus by cutting the chaff (made more evident by the crisis) and bolstering only their most valuable lines.
As early as April 2020, a report by Deloitte, Impact of Covid-19 on the Insurance Sector, found a toll on new premiums (and losses) across travel, events and trade credit insurance. Global gross written premiums in life (excluding health) and property and casualty (P&C) last year fell 2.1%, Allianz’s Insurance Outlook 2021 found, almost double the rate of decline after the global financial crisis. In the breakdown, it emerged that P&C largely kept the ship afloat, managing a small increase in premium income of +1.1%. Reduced consumer spending power since has hit new business volumes.
“The pandemic will have widened the gap between product lines which are attractive and profitable and those which are not,” says Paul Joyce, partner and head of London M&A at Mazars. Insurers’ chief financial officers are reacting; Moody’s annual CFO survey from 21 leading European insurers, published in June 2021, found strong appetite for mergers and acquisitions (M&A). Almost two thirds expected to buy or sell business lines during the next two years, up from 40% pre-pandemic. “Given that a number of the higher-growth product lines are in relatively small, niche markets, the quickest way for the larger players to access them is to acquire smaller, niche specialists,” points out Mr Joyce.
Mazars notes an increasing interest in cybersecurity cover, M&A (warranty and indemnity insurance) and life insurance. But there is a bifurcation in the market between the larger, traditional players and smaller, newer, more dynamic ones. A significant challenge for the larger insurers is trying to differentiate themselves and continue to achieve their organic growth targets. “Larger insurers typically find it more difficult to react quickly and are therefore slower to adapt – this is driving a number of them to look to acquire rather than develop those skills in-house,” says Mr Joyce. Mazars is seeing acquisitions of local specialist managing general agents, for example, or those with technological capabilities to distribute into specific markets, given the pandemic-related increase in remote working.
Given that a number of the higher-growth product lines are in relatively small, niche markets, the quickest way for the larger players to access them is to acquire smaller, niche specialists
With travel and other lines particularly impacted by Covid-19, selling off non-profitable businesses is now a central plank of European insurers’ coronavirus recovery plans, according to the Moody’s report. Flooding the market with poor performers will do little to help prices, however. “A trend to divest those lower-value product lines raises the challenge of who will want to acquire such books of business; and at what valuation,” says
Mr Joyce. A significant drop in market values and interest rates is also weighing on insurers’ back books. “More are focusing on better managing these, and one option is disposal,” the Moody’s report notes. Jonathan Drake, a partner at global legal firm DWF Law, argues this is a strong indication that the next few years “will finally see a significant number of European insurers and reinsurers getting to grips with their runoff and discontinued books of business”.
The recent arrival into the market of some new specialist run-off acquirers, backed by private equity money, suggests this is a view shared by the runoff industry, he adds. Allowing insurers to concentrate on their live business will, Mr Drake says, be a positive development “after a long period of waiting”. He expects more demand for staff with specific skills in the acquisition and management of runoff portfolios.
Private equity may have a much broader role to play in insurance, however. “There is significant dry powder in the PE market and we expect to see significant capital deployment in the next 12 to 18 months,” Mr Joyce says. “The combination of a relatively fragmented market – brokers, for example – and the opportunity to disrupt the industry via technology and new routes to market is, in particular, encouraging PE to invest in the sector.”
While the Moody’s report found insurers’ divestment plans were evenly split between domestic, advanced and emerging markets, which may water down the effects on price of a crowded exodus, on the flipside all the CFOs interested in acquisitions are looking at their domestic markets. Moody’s expects acquirers to focus on deals that buy up market share for scale and cost synergies, while also gaining a competitive advantage – but many insurers competing to chase too few perceived home ‘winners’ will quickly make M&A an expensive pursuit.
“[PE investment] will not only give smaller players access to significantly more capital than before, enabling investment and driving growth, but will also push up valuations as investors compete for the highest quality businesses,” admits Mr Joyce.
The combination of these factors and the potential for further mega deals such as Aon and Willis Towers Watson, means there could be significant changes to the insurance landscape during the next 12 to 24 months.
Laura Miller is a freelance journalist