Europe’s insurance industry is emerging from the coronavirus crisis with a stronger appetite for mergers and acquisitions, along with expectations for strong earnings growth in 2021, according to Moody’s annual survey of chief financial officers (CFOs) from 21 leading European insurers.
Robust M&A activity, which began in the second half of 2020, is likely to continue, with 62% of survey respondents saying they expect to take part in acquisitions or disposals over the next two years, up from 40% prior to the pandemic.
European insurers see M&A as a means of adapting their business models to sluggish long-term economic growth and persistently low interest rates, said Moody’s Investors Service in its report titled “Insurance CFOs ready for M&A amid cautious post pandemic optimism.”
Divesting non-profitable businesses is now a key goal for European insurers because the coronavirus crisis has put additional pressure on already weak markets, the report noted.
“More insurers are focusing on better managing their back books of business as a result of low interest rates, and one option is the disposal of these operations,” it said, noting that insurers’ divestment plans were revealed by the survey as evenly split between domestic, advanced and emerging markets. On the other hand, all respondents interested in acquisitions said they were considering opportunities in their domestic markets
“We expect acquirers to focus on transactions that increase their market share, helping them achieve greater scale and cost synergies, while at the same time strengthening their competitive position,” said the report.
Some insurers are seeking deals that improve the reach of their distribution and diversify their revenues, it added.
“As the pandemic has emphasized the importance of technology, insurers may also target acquisitions that bring technological expertise, helping them further streamline their businesses, bolster digital capabilities and enhance customer experience,” Moody’s affirmed.
The coronavirus crisis has exacerbated many pre-existing headwinds facing the industry, such as sluggish economic growth, the report explained.
Indeed, despite the relative optimism about the prospects for 2021, the report said that 76% of European insurance CFOs named low economic growth as one of their top three worries, making it the sector’s most pressing concern.
Persistently low interest rates are the industry’s second biggest challenge, cited by 57% of respondents as a top three concern, closely followed by market volatility with 52%.
The concerns over low interest rates have increased since 2019 — reflecting two years of significant rate decreases from already low levels, said Moody’s, adding that survey respondents also cited concerns over political and regulatory risk and competitive pressure.
Moody’s said that European insurers are cautiously optimistic for 2021. Most European insurance CFOs expect a rebound in earnings this year as the economy recovers from the coronavirus pandemic.
Approximately 35% of survey respondents predict double-digit growth in operating profits over the next 12 months, while 20% of CFOs foresee a high single-digit improvement, said the report.
In the non-life sector, CFOs expect further price increases in commercial lines but continued pricing pressure in retail lines, said Moody’s.
They also foresee limited additional coronavirus losses because two-thirds of the CFOs “have excluded pandemic risk when underwriting new business or renewing existing policies,” according to the report. All respondents now expect reserve releases to remain broadly stable or increase.
*This story ran previously in our sister publication Insurance Journal.