NN pursuit of Delta Lloyd suggests SII to drive M&A pick up: Fitch

Last week NN Group announced that it had made an all-cash offer of €2.4bn for its fellow Netherlands-based rival Delta Lloyd.

Delta Lloyd rejected the offer. However, it did not rule out the possibility of a successful transaction on revised terms.

Fitch said the bid forms part of its predicted uptick in European insurer M&A activity as a result of Solvency II.

hide

“We believe firms with limited diversification or those skewed to business harder hit by Solvency II capital requirements are the most likely targets. Smaller insurers in particular face a greater burden from the sharp increase in costs associated with Solvency II. Smaller firms are also likely to have fewer options for raising fresh capital if S2 ratios weaken,” said the ratings agency.

Solvency II heavily affected Delta Lloyd due to its business mix and capital management strategy, according to Fitch. It also points out that the Dutch regulator has taken a relatively tough stance on Solvency II implementation.

Meanwhile, Fitch said that NN Group’s strong capitalisation makes it well placed to realise further capital benefits by expanding its Dutch market position.

Fitch noted that saturated markets in most big European countries and generally weak profitability make organic growth difficult for insurers. Therefore buying market share is likely to be an attractive option, it added.

Capital calculations can also benefit from diversification under Solvency II. A combined solvency position following an acquisition could be “significantly higher” than a simple weighted average of two firms’ Solvency II ratios, explained Fitch.