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S&P lukewarm on prospects for continued insurer mergers

S&P lukewarm on prospects for continued insurer mergers

Mergers and acquisitions among global insurers likely will continue this year despite a patchy track record, according to a report by Standard & Poor's Corp.

The global insurance industry accounted for about $150 billion of M&A in 2015, the report said, and deal-flow likely will continue, albeit at a slower pace, in 2016.

M&A deals will be fueled by record high levels of capital in many areas of the industry, notably reinsurance, few opportunities for organic growth, low or uncertain investment returns in domestic markets and evolving regulation including the Solvency II risk-based capital regulatory regime that came into force in the European Union this year and the U.S. Affordable Care Act, S&P said.

“As a result of favorable financing conditions, we are also seeing new classes of buyers,” S&P said in the report.

“These range from corporate conglomerates to high net worth and sovereign wealth funds, particularly from the likes of China and Japan,” the report said.

S&P said it had taken a fairly neutral view of insurance M&A over the last 15 years, “albeit with a bias toward conservatism.”

Of the 50 largest transactions since 2000 involving insurers rated by S&P, nearly two-thirds of ratings of the acquirers were affirmed by the rating agency on announcement of an acquisition, while 22% were placed on a negative outlook— with more than half eventually downgraded within five years, S&P noted.

S&P said that it was difficult to measure the success of M&A in the insurance industry, partly because books or business or entities often are merged into existing entities and therefore become difficult to track.

But the rating agency noted that many observers believe that the insurance industry does not have a strong track record for M&A.

In the report, “Global Insurance M&A Trends Should Continue in 2016 Despite a Patchy Track Record of Successful Deals,” S&P said that the share prices of many acquiring insurers often experienced significant abnormal returns by the end of the first year after an acquisition announcement.

It also found that in more than two-thirds of cases, a deal did not result in a financial strength rating upgrade for the buyer and that, on average, one in every eight acquiring companies announced a disposal of the target company or a portion of its book of business in the 10 years following a deal.

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