Insurance firms look to spend surplus capital on M&A

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A surge in mergers and acquisitions (M&A) and share buybacks could sweep Europe's insurance sector this year, as firms look to put surplus capital to work.

According to a survey of chief financial officers conducted by Moody's Investors Service, low interest rates remained the single biggest worry in the sector.

The results gathered opinion in the first full year since the European Solvency II directive was implemented, which regulates the amount of capital insurance companies must hold.

“With large European insurers reporting solid levels of capital one year after the Solvency II regime took effect, chief financial officers are turning their attention toward the deployment of excess capital,” said Moody's associate managing director Antonello Aquino.

“Over 40 per cent of chief financial officers surveyed are now looking for ways to deploy this surplus, up from just over 10 per cent in 2016, with M&A and share buybacks the main options available to them.”

There has already been some evidence of this in action, as insurance firm Towergate announced earlier this year that it would merge with Autonet, Chase Templeton, Ryan Direct and Price Forbes.

A study by KPMG earlier this year also hinted at a forthcoming avalanche of insurance firm deals, as a massive 84 per cent of insurance firms said they planned to make at least one acquisition.

More than one third of respondents in the Moody's study named prolonged low interest rates as 2017's top challenge, slightly down from a year ago.

Insurers are being forced to reinvest maturing assets at lower rates of return than the historic level, which is increasing the appetite for illiquid assets.

The survey showed around 30 per cent were anticipating increasing their exposure to real estate, private placements, infrastructure and mortgages or loans.

Moody's said it expects this gradual shift towards higher-yield assets to continue.

Read more: How to make Brexit the insurance industry’s next big opportunity

On the other hand, the surveyed insurance officers did not expect to issue large volumes of debt over the next two years, with 44 per cent saying they will issue only enough to cover refinancing needs.

The firms were showing a large commitment to technology, with around 90 per cent saying they had invested in technology to improve customer access to services, make greater use of big data and improve their back office operations.

Artificial intelligence and the internet of things will be the next areas of investment focus, according to Moody's.

Full story: Insurance firms look to spend surplus capital on M&A: City A.M.

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