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I. Review of M&A Activity in 2015
There are continued signs that Lloyd’s is looking to innovate and expand in other areas under the strategy outlined by its new CEO, Inga Beale. These strategies include increasing the use of information technology in its processes and embracing alternative forms of capital, which Ms. Beale suggested at the Monte Carlo Rendezvous are growing areas of interest in the market.
3. Consolidation of Intermediaries
A further emerging trend during 2015 was an upturn in broker and intermediary M&A within the European markets. Numerous smaller scale acquisitions of insurance agents by risk carriers occurred, as insurers sought to maximize their distribution potential. Some larger deals suggest that strategic consolidation is also continuing. One notable cross-border transaction was the acquisition of the major wholesale broker Miller by Willis. Willis itself has had a particularly significant year in M&A having also announced a merger with Towers Watson on June 30, 2015 with the aim of creating a leading broking, advisory and solutions firm. In addition, Willis acquired the remaining 70% stake it did not previously own in Gras Savoye, a French insurance broker. The transaction was valued at €550 million and was aimed at extending Willis’s presence in France.
The European intermediary market, in particular the group of specialist London brokers, remains less consolidated than the related risk carrying sector. For example, at Lloyd’s there are more than 180 registered brokers working in the market and, although there have been challenges to consolidation in what is regarded as a very relationship-focused business, our prediction is that other benefits of scale will become increasingly important and we expect further consolidation within the broker and intermediary market in 2016.
4. Future M&A Trends and Drivers in Europe
We expect that several drivers will affect in-bound and out-bound European insurance M&A into 2016. Of paramount significance across the U.K. and the continent will be the arrival of the Solvency II regime, which the European insurance industry has been anticipating for many years, given the original target implementation date of October 2012. The new rules have now come into effect on January 1, 2016 and insurers have begun to live with the much-anticipated approach to risk, regulation and capital management. For the past several years Solvency II has been cited as a driver of consolidation and reorganization. Now, with the implementation of the rules in full force and in light of the regulators’ responses to such rules, the full implications of the new regime for insurers will become evident. It is important to note that there will be winners and losers under the Solvency II risk-based regime. Insurers with the best corporate governance and well-managed portfolios of business will be best placed to take advantage of the market.
We believe that, over time, the Solvency II dynamic will spark additional M&A transactions, including sales of subsidiaries and portfolios of specific types of business. These transactions may be partly in response to pressures identified from working within the new regulatory and risk-based capital regime, but also for insurers to benefit fully from the operation of such a risk-based regime. For example, we expect to see more transactions where insurers sell non-core businesses and acquire complementary assets in portions of the market where they have a leading market position. Insurers could also exchange portfolios of policies in order to benefit from the diversification of insurance risk, the increased use of alternative investment strategies and innovative capital management proposals from reinsurers. In addition, we can expect further activity from European insurance groups in the emerging markets in order to create diversification from their more mature European operations, notwithstanding that they may face fairly tough competition from increasingly expansionist local insurance groups in those emerging markets.
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Developments and Trends in Insurance Transactions and Regulation 2015 Year in Review