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Inside magazine issue 12 | Part 03 - From a corporate perspective Below we show how M&A can be attractive from the perspective of both the acquirer and the seller: Acquirer’s motivation to enter into an M&A 01 The low levels of claims arising from catastrophes during 2015 has generated an excess of capital in the market. An increase in capital pushes the Return on Equity (RoE) further down, putting more pressure on margins. This forces undertakings to look for attractive businesses in order to reinvest the excess of capital and increase the RoE. 02 The excess of capital in the insurance market, plus the tightening of capital requirements under the Solvency II framework, explains why capital optimization has become a must, and in particular the optimization of capital allocation. This means that insurers are carefully evaluating which business they should enter into, keep or let go of, according to their optimal capital allocation strategy. 03 Incentives for diversification increase since diversification implies that less capital is needed to support the underlying risk. This allows insurance undertakings to enter into new business with less capital and increase the RoE. 04 Organic growth has become harder to pursue for insurance undertakings in mature markets. The effort to reach new customers is highly competitive. Insurance undertakings are forced to lower premiums in order to remain attractive to policyholders and this keeps pushing down margins. The alternative is to enhance growth in the customer base through M&A. 05 In recent years, PE firms, hedge funds, and conglomerations backed by PE have increased their activity in the life insurance business (mainly in unit-linked business). The fact that both annuity and life insurance business are characterized by high Asset-to-Equity ratios is very appealing to these types of business, as this allows them to have access to a relatively large portfolio of assets with low capital requirements as well as benefit from increased investment expertise to make the portfolio more profitable. 120
Inside magazine issue 12 | Part 03 - From a corporate perspective Seller’s motivation to enter into an M&A 01 The low interest rate environment is increasing pressure on margins, which, in turn, puts more pressure on the technical result since the financial result is lower than expected. In addition, in the life insurance business the low interest rate environment and the mismatch in duration between assets and liabilities make it difficult for insurers to enhance profit. 02 Pressure on margins creates pressure to cut costs. The main synergies behind cost reduction in an M&A deal arise from economies of scope and economies of scale. 03 As a result of the desire to reduce costs, Business Process Outsourcing (BPO) is seen as a potential solution. Insurers are looking to outsource certain functions, such as claims management, policy management, IT, distribution, actuarial, etc. In particular, the rapid evolution of technology — and the demand for this from customers — has forced insurers to integrate a strong technological aspect into their expertise (e.g. telematics). Nevertheless, before integrating an expensive technological area into their budget to keep up with competitors, BPO or merging with another undertaking that already has the technology is a compelling option. 06 If a suitable buyer is willing to buy portfolios that are not part of the seller’s core business or not in line with the existing risk appetite, at a suitable price, it is advisable to sell. 04 A tightening of the regulations can be quite expensive, creating more administrative costs in order to fulfill the regulation standards (PRIIPS, FATCA, IDD, etc). In the case of Solvency II, the capital requirement is more demanding than Solvency I. Rising costs and capital requirements are an incentive to enter into an M&A. 05 Capital Allocation Optimization has become a number one priority not only for undertakings with excess of capital, but also for undertakings in which capital is scarce. In fact, if capital is placed in a low profit business, this motivates insurance undertakings to sell the business, release capital and properly reallocate it to enhance profit. 121
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Inside Triannually insights from De
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Inside magazine issue 12 | Contents
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Inside magazine issue 12 | Foreword
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Inside magazine issue 12 | Part 01
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Page 70 and 71: Inside magazine issue 12 | Part 02
Page 144 and 145: Inside magazine issue 12 | Contacts
Page 146: Our expert authors, who are brimmin
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