Mergers and acquisitions in the insurance industry are now at their highest level for many years, with the weak global economic environment and regulatory changes spurring many to consider business sales, whilst low interest rates and funding costs benefit the potential buyers.
According to Moody's Investors Service, insurance M&A reached over US$200 billion through the end of Q3 2015 alone and the bounty is set to continue, according to a report, which forecasts that M&A activity will remain a staple for some years.
"M&A is often credit negative for the acquirer, although recent deals have led to a more mixed credit response, with the long-term benefits of franchise-changing deals often being significant", said Simon Harris, managing director at Moody's Global Insurance group.
Around 50% of acquirer ratings showed no rating movement or, in a few cases, even a positive rating response to announced deals.
"We expect M&A to halt only if interest rates rise significantly, or equity markets fall dramatically – although even the latter reduces sales prices. We expect that interest rates will remain at historically low levels globally and that debt-funded M&A will remain attractive for some years," Harris continued.
Moody's notes that many insurance groups increasingly recognise the need to achieve higher scale or greater efficiency to help manage the damaging impacts of a low-return investment environment and such factors are often exacerbated by regulatory changes, such as Solvency II in Europe, or changes to the healthcare regime in the US.
This combination of factors has led many insurers or other financial institutions to consider disposals or mergers, that in many cases present 'once in a lifetime' opportunities for those groups with the financial capacity to make acquisitions in the current climate.
The analyst notes that some of the largest deals have been 'in market', notably in the US health insurance sector, with the need for greater scale, amplified by the economic and regulatory environment, a key driver.
There has also been significant cross-border deal activity as Chinese and Japanese groups have been active in the US and EMEA, with the continued appreciation of the Chinese yuan versus the US dollar and Euro providing a much stronger ability for Chinese groups to consider meaningful non-domestic acquisitions.
A case in point is Anbang Insurance Group's decision last week to buy HRG Group Inc.’s Fidelity & Guaranty Life for about US$1.6 billion in cash.
Although the Japanese Yen has shown relative depreciation against both the USD and Euro in recent years, the appetite of Japanese firms to seek non-domestic acquisitions to offset sluggish growth from domestic insurance operations has continued to be whetted.