Bill Cooper, Managing Director and Global Head of Insurance at Lloyds Bank Commercial Banking. 
Although mergers and acquisitions has been a common trend in insurance and re-insurance market for decades, prevailing commercial, economic and regulatory pressures have combined to make insurance assets more attractive for a range of buyers and consequently drive M&A volumes.
Macro-economic challenges
The macro-economic climate continues to be challenging for insurers, who struggle to make decent returns on the investments they hold to cover potential claims. With interest rates at record lows and bond yields in the doldrums it has proved difficult for insurers to justify capital investments for growth or business improvements.
In addition, falling premiums across many traditional product lines continues to hamper organic growth, increasing the need for insurers to actively target new products, services and markets if they are to achieve their commercial goals.
The need for insurers to access new revenue streams has been heightened by the impact of technology. During the past decade the pace of technological change in the sector has been unprecedented, with new models, new technologies and new competitors such as price comparison sites changing the rules of the game. All signs indicate the pace of change is going to increase in the future.
Insurers need to upskill in areas such as such as data analytics, intelligent pricing, anti-fraud and telematics. M&A could provide the quickest way to improve in-house capabilities and counter the threat posed by aggregators. However, this approach requires significant capital reserves and is not without risk.
Regulation
M&A activity in the sector is also being driven by the capital pressures insurers face due to the increased burden of regulation. Lingering questions around the impact of Solvency ii has seen many firms dispose of their non-core units as they consolidate around stronger markets. In particular this applies to firms whose ratings are under pressure from write downs on Southern European government debt or investments in distressed real estate markets.
The impact of regulation in the banking sector has had a knock on effect in the insurance market. Capital constraints imposed on UK and European banks through Basel III has encouraged many to reduce their exposure to insurance assets. This has created a market of bolt-on targets for acquirers and outside investors attracted by the possibility of decent returns from these businesses in the current low yield environment.
Brokers
The broking market has traditionally seen a significant volume of M&A activity for a variety of reasons. The lack of underwriting on broker’s balance sheets and cash-generative nature of their business makes them attractive to external investors such as Private
Equity houses.
Despite a wave of consolidation in recent years, the market remains fragmented. A significant proportion of the sector remains under the control of independent and regional brokers. Many of these firms were established in the 1970s and 1980s and their owners are now approaching retirement age and looking to find a suitable home for their business.
Others are disillusioned by the pressures created by the regulatory environment, rising technology costs and falling premium rates, making them more receptive to a potential offer.
Furthermore, the decline in M&A activity by large consolidators has created a gap in the market that is increasingly being filled by ambitious mid-tier brokers such as Stackhouse Poland and Aston Scott. Both of these firms have secured private equity investment in recent months to support their plans to scale up.
Many mid-market firms are run by quality management teams who cut their teeth working in senior roles within the large consolidators. They are hungry for investment as they look to embark on their own build-and-buy journeys. Both of these characteristics appeal to external investors, who recognise these businesses could offer potential exit routes in the form of a trade sale or flotation at some point in the future.
Lloyd’s of London
The nuances of Lloyd’s of London market continues to appeal to both external investors and trade buyers, and their appetite to acquire Lloyd’s vehicles is unlikely to recede in the future.
There are several reasons for this. The Lloyd’s market benefits from a collective credit rating, reducing the risk of downgrade from individual claims, it has a formidable list of global licences allowing business to be written globally and it covers risks in syndicates meaning the costs of any exposures are spread out. This safety in numbers approach appeals to global insurers and potential investors. There is also a possibility for investors to make significant returns, with typical yields generated in the London market significantly higher than those generated in traditional corporate markets. Thus we have seen increasing interest from Chinese and Japanese investors who wish to diversify outside local markets.
Conclusion
An increasingly competitive market will put pressure on brokers and insurers to differentiate and find a proposition that stands out from the crowd. More firms will undertake mergers and acquisitions to build out their capabilities and increase scale.
In addition, external investors will also help drive M&A activity as they look to deploy their expertise in the sector and ultimately secure the returns they are looking for.
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