Delta Lloyd, Endurance Deals May Herald a Wave of Insurance M&As

By | October 6, 2016

NN Group NV and Sompo Holdings Inc.’s approaches for smaller competitors may herald a wave of mergers and acquisitions in an insurance industry that’s struggling with low interest rates and increased regulation.

Japan’s Sompo agreed to buy Bermuda-based Endurance Specialty Holdings Ltd. for about $6.3 billion, while NN offered to acquire Delta Lloyd NV for $2.4 billion euros ($2.7 billion) without gaining the approval of its fellow Dutch insurer.

“Regulation comes with high costs and diversification benefits, while low interest rates put pressure on cash flows. Large insurers are better equipped to handle both,” Cor Kluis, an analyst at ABN Amro Group NV in Amsterdam, said by phone. There’s a move to consolidation with bigger companies taking over smaller ones, he said.

The low-interest-rate environment is piling pressure on the profitability of insurers, increasing risk as they seek higher-yielding assets, according to industry regulator EIOPA. About $61.8 billion worth of insurance-company acquisitions were completed last year, 31 percent more than a year earlier, as record levels of capital from alternative providers such as hedge funds placed pressure on pricing.

China’s biggest industrial companies want to buy insurers as they seek to grow outside Asia as the domestic economy slows and falling insurance rates prompt more firms to do deals, broker Willis Towers Watson Plc said in April.

Japanese Buyers

Sompo, which largely sat out a multi-billion-dollar acquisitions spree by its peers in the past two years, is joining other Japanese insurers in expanding abroad to counter slowing growth at home. Dai-ichi Life Insurance Co. bought Protective Life Corp. last year, and Sumitomo Life Insurance Co. agreed to purchase Symetra Financial Corp. for about $3.8 billion.

NN is trying to increase its presence in the pensions and insurance industries in the Netherlands by acquiring Delta Lloyd, which returned to profit in the first half after cutting costs and completed a 650 million-euro rights offer.

“The proposed acquisition makes sense to us as synergies could be important, both in terms of costs and capital,” Matthias de Wit, an analyst at KBC Securities in Brussels, said in a note to clients. He has a reduce rating on Delta Lloyd and a buy rating on NN.

Delta Lloyd climbed about 28 percent to 5.28 euros in Amsterdam trading, the most since its initial public offering in 2009. That’s just below NN’s bid of 5.30 euros a share. Delta Lloyd said it received a “conditional, unsolicited” offer and its boards are studying it.

Endurance surged 35 percent in New York Tuesday after the Nikkei newspaper reported a deal was imminent. The shares were up 4.4 percent at $91.77 at 11:35 a.m. on Wednesday after the transaction was confirmed.

Endurance, which is led by Chief Executive Officer John Charman, started operations in 2001 after the Sept. 11 attacks in New York. It grew by acquiring businesses, including last year’s purchase of Montpelier Re Holdings Ltd. The firm has operations in the U.S., Europe and Asia.

In response to NN’s bid, Delta Lloyd said it is reorganizing operations in Belgium and plans to combine the life-insurance business with its activities in the Netherlands. That will raise Delta Lloyd’s Solvency II ratio by about 5 percentage points.

Delta Lloyd shored up its capital buffers in a highly contested rights offer in April that only went ahead after Fubon Financial Holding Co., one of its largest investors, unexpectedly changed its position from opposing the share sale to supporting it.

Fubon, which holds almost 10 percent of the insurer, had previously backed Highfields Capital Management LP, Delta Lloyd’s largest shareholder, in a court bid to block the vote. Highfields didn’t reply to a request for comment outside normal office hours.

‘Outspoken Shareholders’

“Delta Lloyd likely has a preference to stay independent and rebuilt the business after all they’ve been through in the past year,” said Joost van Beek, an analyst at Theodoor Gilissen Bankiers NV. “They also have very outspoken shareholders, so NN will be in for a long battle.”

Hedge funds including Highbridge, Capital Fund Management, Citadel Advisors II, Bluecrest Capital Management and Marshall Wace are currently shorting Delta Lloyd’s shares, according to data compiled by Bloomberg. Investors short companies by selling borrowed stock and seek to profit by buying it back later at a lower price.

Marshall Wace and Capital Fund Management declined to comment on their short position. Bluecrest, Highbridge and Citadel didn’t reply to a request for comment outside normal office hours.

–With assistance from Martijn van der Starre and Celeste Perri.

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