Solvent Survivors

Solvency II sounds like the title of an unimaginative Hollywood movie sequel. But this insurance industry EU directive, due in 2012, promises some interesting plot twists — including a big rise in M&A activity, surprising in today's turmoil.

When Swiss insurer Helvetia announced in March that it would buy Italy’s Padana Assicurazioni, a small company providing private insurance policies for employees of energy group ENI, formerly its parent, the deal must have been a relief to management and investors alike. Last year, chief executive Stefan Loacker had told reporters that Helvetia wanted to be a player in industry M&A, but that a lack of willing sellers was dampening deal flow. And make no mistake, Helvetia wants — and needs — to grow.

“The clear message that we get from analysts and investors is ‘You’ve delivered some nice results in the last few years. We need to see the growth story now — either that or you give capital back to the shareholders,’” says Paul Norton, Helvetia’s CFO since July. “There’s clearly an increase in the pressure from a couple of different sides, which leads us to say that we do need to grow.”

Investors are one big reason why insurers such as Helvetia are feeling the pressure to build and branch out. Brussels is another. What lies behind this is Solvency II, a European Commission directive due in 2012, which will overhaul the legislative supervision of Europe’s insurers for the first time in more than 30 years. Though still at draft stage, the new directive looks set to favour insurers that have diversified their business by requiring them to hold less capital to cover their range of risks. Ratings agency Standard & Poor’s reckons that more than a quarter of Europe’s 5,000 insurers will face “major strategic decisions” once the new rules are introduced, including whether to get involved in industry M&A.

As it happens, plenty of insurers have already been brushing up on their deal-making expertise as part of overall growth plans. (See “Big Buys” at the end of this article.) Some are targetting emerging markets. Others are branching out into product distribution. But all are being cautious in a quintessentially risky business. The burning question their CFOs are now asking is how to manage M&A strategies at a time when market conditions are making any kind of deal-making so difficult.

While few European insurers have had to announce significant writedowns as a result of exposure to America’s subprime crisis, investors seem to have treated insurance much the same as any other financial-services stock — when German bank Sal Oppenheim published a study of insurance consolidation in December 2007, it noted that valuations were close to a ten-year low. The fact is that “every insurance company in the world is getting hammered by the developments in the financial markets,” says Joseph Streppel, CFO of Aegon, a Dutch life insurer with revenue-generating assets of €371 billion.

So even though Streppel expects Solvency II to drive deal activity, the current environment for public companies such as Aegon is that “it’s pretty difficult to stick our necks out and do a large acquisition,” he says. Issuing shares would be tough and few investors would be happy to see the board use surplus cash — Aegon has more than €1 billion — to pay a premium. That said, standing still won’t be an option for long as Solvency II approaches.


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