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Surplus capital and non-core disposals to drive uptick in insurance M&A activity

Latest analysis from leading business and financial advisers Grant Thornton UK LLP suggests the global insurance markets will see renewed interest in merger and acquisition (M&A) activity to the near term. The report identifies improvements in the cash reserves held by larger insurers, along with divestment of non-core insurance-related assets by more generalist financial institutions, to be key drivers of M&A in 2014.

Geographically, the United States remains the most active region for insurance transactions. However, the European market as a whole is showing signs of renewed growth, led by the broader economic recovery. The report confirms Europe’s standing as an attractive location for M&A, securing 19% of the global deals between 2011 - 2013, second only to North America, which dominated the market with 61%.

The report also suggests the regulatory environment, both for insurers and other financial institutions, will have a positive impact on the volume of transactions over the coming years. It notes that onerous solvency and corporate governance requirements in North America could cause mid-sized and smaller underwriters difficulty, leading to deals with larger institutions which possess the resources to navigate these changes. Moreover, new regulatory constraints on banking institutions will support a wider disposal programme, particularly as banks look to rebuild their balance sheets and exit non-core activities. 

Peter Allen, Global Head of Insurance, and Head of UK Financial Services at Grant Thornton UK LLP commented: “Having kept a closer eye on capital and adopted leaner, more efficient operating models to survive the downturn, many of the international players have entered 2014 with a larger 'war chest'. This cash surplus, coupled with improved optimism in the sector and interest we're seeing from non-insurance specialists looking to dispose of insurance-related assets, all point to a higher likelihood of consolidation around the world."

Grant Thornton's report also reveals that the UK is the most attractive European country for M&A in the insurance market. Despite stringent entry requirements imposed on institutions, Lloyd’s of London remains one of the most appealing markets; guaranteeing immediate access to a global network of licenses, a pool of business and a rating for insurers outside of Europe.

Craig Scarr, Partner and Chairman of UK Insurance at Grant Thornton UK LLP, added: "London's long-standing role as a global insurance hub helped to keep it relatively buoyant over the past few years, so it's somewhat natural that European deals centred around the UK market. Surplus capital in the Lloyd's of London market would also drive activity in both coverholder expansion and broker acquisitions. That said, a relaxation of M&A rules, particularly in China, could see domestic interest diverted to these higher-growth markets. We're also seeing increasing speculation of M&A in the Bermuda market, which many believe is long overdue and largely triggered by a combination of soft market fears and structural threats to the traditional operating model."