Moody's Foresees European Insurers' M&A Activity Rising

Antonello Aquino, a London-based Moody's vice president-senior credit officer wrote in his report on European insurers that "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 lackluster organic growth outlook in many European markets; and (iii) the restructuring of some financial groups in order to meet EU competition rules."

Basel II consists of the capital requirements recommendations and regulations for banking laws issued by the Basel Committee on Bank Supervision. Solvency II is the updated set of regulatory requirements for insurance firms operating in the European Union scheduled to come into effect late in 2012.

Moody's also observed that the relative stabilization 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.

The firm cited as proof of the changing M&A environment the announcement, at the beginning of March of the "largest-ever insurance M&A deal ($35.5 billion) involving UK-based Prudential Plc and Hong Kong-based AIA Group.

Consolidation in the European insurance industry, said Moody's, may have different credit implications depending on a series of factors including, 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," concluded Mr.. Aquino.

His report said the fragile European economic outlook will continue to depress growth of premiums in the main European markets, with growth opportunities being sought outside Europe.

Moody's commented that it believes that European insurer M&A activity which takes place "will mostly be cross-border, targeting emerging countries outside Europe given the fragile economic outlook for many European countries."

"Nevertheless," the company said, "some local consolidation is also possible, mostly driven by internal restructuring and regulatory pressure."

Its report said that insurance growth in Europe is expected "to be muted due to slow economic growth and already high insurance penetration. Many European groups have already started diversifying away from Europe over the past decade with the most recent and emblematic acquisition – which is still pending regulatory approval – announced by Prudential plc in Asia last March."