Berenberg said that as falling prices and rising capacity squeeze opportunities for profitable organic growth in the insurance industry, inorganic growth is taking center stage, with excess capital likely to be deployed into mergers and acquisitions.
In a new report, the company highlighted the cyclical nature of the insurance industry, noting that the industry is currently in a phase of declining pricing, which can be seen across multiple lines of business including commercial lines, personal lines and reinsurance.
“That doesn’t necessarily mean that earnings are contracting, because these pricing effects will be recorded in the income statement with a lag, and the insurance company will have reserves available at the same time to improve cost efficiencies and of course increase volume to try to offset the pricing effects,” Berenberg explained.
Inorganic growth was reportedly one of the main takeaways from Berenberg’s conversations with executives in January, and while the topic came up frequently, the focus was primarily on small bolt-on acquisitions rather than transformational deals.
“In any case, our understanding is that any merger should not disrupt and undermine an insurer’s existing capital allocation plan,” Berenberg added.
The firm’s report continued: “We believe the potential consolidators in the European insurance space remain the major Japanese insurers and larger European insurers, which will have $40 billion of firepower to reinvest by 2030.
“With Zurich bidding for Beazley, the attractiveness of London market assets is once again in the spotlight, highlighting the growth potential offered by specialist insurance.
“Our understanding is that European insurers are most interested in bolt-on transactions rather than transformational acquisitions. These bolt-on transactions include both listed and unlisted assets, as companies also seek to enhance their capabilities in specific areas.
“While Zurich’s bid for Beazley is large in absolute dollar terms, we view it as more of a large add-on deal rather than a transformative one as Zurich’s existing specialty business is 1.5 times larger than Beazley’s total group premiums.”
Berenberg concluded: “We believe that for many of the insurers in our coverage universe, their excess capital is likely to be used for inorganic growth and support dividends in outside years rather than for unconventional distributions.
“As such, while the potential for capital allocations may be tied to and constrained by earnings growth, we view this growth as safe and therefore reiterate that one of the key attractions of owning shares in the European insurance sector is attractive capital allocations.”