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.

Root and Branch

One of the main proposals of Solvency II focuses on companies’ solvency capital requirements, which will be worked out with a risk-based model, rather than the mathematical formula of Solvency I. If a company underwrites businesses in areas unlikely to run into a crisis at the same time — say, car insurance in the UK and home insurance in the US — Solvency II should require it to hold less capital to cover the combined risks than for either individually.

The beneficiaries are expected to be large, diversified insurers with good risk management processes. Smaller companies with fewer business lines may suffer. “That is bound to lead to some sort of pressure for M&A activity across Europe,” says Ian Dilks, global insurance leader of PricewaterhouseCoopers. “Either for big companies taking advantage [of the new regulation] or smaller ones finding that they have to sell out because they’re just not going anywhere.”

Yet don’t expect big-ticket M&A in an environment where it’s hard to borrow money “whether you’re trying to buy a house or a £7 billion insurance company,” says Matt Lilley, an insurance analyst at Lehman Brothers. Rather than encouraging deals between large players that are “obsessed by staying independent,” he says current insurance consolidation is likely to involve smaller transactions — lesser players merging or larger companies acquiring smaller businesses as bolt-on buys.

Indeed, at Aegon, bolt-ons are currently all that’s on the table. But Streppel says that’s not a concern. Despite several acquisitions in the past — the largest being its $9.7 billion takeover of Transamerica in the US in 1999 — the company today focuses on organic growth in its core markets of the US, the Netherlands and the UK. There’s now a limit to the synergies that can be achieved by growing through M&A in these markets, Streppel says. “We don’t need to expand scale there because our unit costs will probably not be much lower if we double the size of those companies.”

In central and eastern Europe, however, acquisitions have helped the company enter new markets and, adds Streppel, expand “a little bit faster” than it could have if it were starting a business from scratch. Earlier this year, for example, it used the acquisition of Ankara Emeklilik, a life insurer and pension provider with €35m of assets under management, to enter Turkey. Such small deals are a necessary step in global diversification, Streppel says, and bode well for future organic growth. “In 10, 15 years from now, countries such as Hungary [could be] comparable to Belgium,” he says. “To build up a position now in Hungary, the Czech Republic, Slovakia, Poland and Romania is a good thing. So we spend money there on small acquisitions, and we have capital available to grow pretty fast in those countries.”

Under Pressure

Not all insurers are so keen to branch out into new markets, even if they want to flex their acquisitive muscles. In Switzerland, Norton of Helvetia says, “we’re not going into eastern Europe, we’re not going to go into emerging markets — Asia, India or whatever.” As he sees it, the company has neither the infrastructure nor the people to crack new markets for now. Instead, Helvetia is focusing on core markets of Switzerland, Spain, Italy, Germany and Austria. The company’s gross written premiums of SFr5.5 billion (€3.5 billion) are fairly evenly split, with SFr2.9 billion from its life-insurance business and SFr2.6 billion from non-life. But the life business is concentrated in Switzerland, and Norton wants to rebalance this.

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