The wave of heavy consolidation that swept through the insurance industry this summer may not be over. Thanks to low yields in the bond market, carriers are moving toward alternative investments and equities to ensure financial stability, and may even shore up funds by pursuing more mergers and acquisitions within the industry.
Because insurers rely on the purchase of bonds to write competitive business, the low rates introduced by central banks following the 2008 financial crisis has been troubling to many a balance sheet. In fact, 57% of respondents to a survey from Natixis Global Asset Management said they plan to increase their allocations to alternatives in the next 12 months, including in private equity, hedge funds, infrastructure and property.
Keen to increase returns in the low-interest rate and soft market environment without raising operating costs, insurers are considering pooling their resources with former rivals.
“To consolidate or not to consolidate, to acquire or not to acquire – that is the question every management team is asking,” said Insurance Information Institute President Robert Hartwig. “That would imply there are some efficiencies that are going to occur. That implies there would be a merging of investment portfolios.”
The consolidation option has already been exercised to great levels this year. No fewer than seven transactions worth more than $1 billion were either announced or completed during the summer.
The string of merger and acquisition activity began in May, with Chinese juggernaut Fosun International’s announcement that it would pay $1.84 billion to acquire growing insurer
Ironshore Inc. A $4.8 billion deal between Catlin and XL Group followed shortly after, and HCC Specialty made headlines in June by agreeing to a $7.5 billion takeover offer from
Tokio Marine.
“[There is] a significant mergers-and-acquisitions trends in the insurance space that we expect to persist,” FBR Capital Markets analyst Randy Binner wrote in a July note. “Excess global liquidity and low interest rates are the drivers of the M&A trend, and as long as this environment persists, we believe insurers could be pressured to buy properties where rates are higher, or merge in an attempt to gain scale.”
Growth, of course, cannot continue indefinitely and analysts say that the recent “feeding frenzy” in the P/C space has its limits.
The majority of major acquirers, Binner noted, “have their deals now, so the pool of buyers is dwindling.”
