Mergers and acquisitions in the life insurance industry are expected to to rise sharply in the coming years now that companies have regained financial health, Swiss Re said. Swallowing rivals is often the only way to swiftly boost top-line growth and satisfy hungry investors, the world’s second-largest reinsurer said in a study, while new accounting rules will improve transparency in the sector.
“Although not likely to return to the levels seen in the late 1990s, M&A activity is expected to pick up over the next several years,” the authors concluded, which reinsures large or volatile risks for primary insurers, its clients.
Cost cuts and better investment returns had helped life insurers recover from a rough patch at the start of the decade, Swiss Re said, when the equity market collapse triggered a series of loss-making years in most, eating huge chunks out of their balance sheets.
In Europe, available risk capital was still below the levels seen in 1998, but the industry was well under way to be sufficiently capitalized. Risk capital in the United States increased by $66 billion between 1998 and 2004.
The world’s biggest insurers would play a leading role in consolidation in life insurance, where the 10 biggest groups account for a market share of just 28%. That is well below 38% of global revenues attributed to the world’s 10 biggest banks and 46% of global revenues accounted for by the world’s 10 biggest pharmaceutical companies, Swiss Re said.
The world’s 40 largest life insurance groups increased their market share from 48.9% in 1998 to 55.9% in 2004, the study showed. The increase was entirely driven by 12 out of those 40, which have global businesses. They include AIG and Metropolitan Life, both from the United States, France’s Axa, Germany’s Allianz, ING from the Netherlands and Generali from Italy.
Swiss Re also said that new IFRS accounting rules in Europe and the introduction of risk-based capital requirements from regulators called Solvency II would make the life insurance sector easier to understand for potential buyers.
“This may attract increased interest from potential North American and Asian acquirers seeking geographical diversification,” Swiss Re said in the study. Slow economic growth in Europe and mature pension markets in countries such as the United Kingdom, Switzerland and the Netherlands made organic growth hard, further underlining the need for growth by acquisitions.