The recent news of Aviva buying the UK protection business of AIG for a consideration of £460mn has sparked fears that the continuing loss of insurers from the protection market will mean less competition and client choice.
In May, Canada Life sold its UK individual protection business to Countrywide Assurance.
And then in April, Royal London, the UK’s largest life, pensions and investment mutual, announced plans to acquire the individual protection book of Aegon UK.
And although historically over the past three decades or so many insurers have exited the life insurance market, the three this year so far have been notable.
So how much more consolidation is there to come?
Impact from bonds
According to Abid Hussain, director and research analyst – insurance at Panmure Gordon, these deals are taking place because company valuations are low at present, while companies may be looking to offload certain divisions because they are no longer a strategic fit for the business.
Hussain says: “The market isn't valuing them correctly at the moment – the public markets that is – off the back of macros and, in particular, bond yields rising.
"I fundamentally think higher bond yields are favourable or good things for insurers. But the market tends to treat life insurers and the broader insurance market as if it is a bond market.
“So as yields go up, the life insurers’ stock prices go down. I think that's fundamentally wrong. But I'm swimming against a wave.
“That's how these stocks are traded. I've seen them trade like this way in previous cycles, and they're going to continue to trade like this.”
As the bond yields rise this stokes fears of a recession and that credit risks are going up, which leads to further scrutiny of company balance sheets to ensure they can withstand future market difficulties.
But Hussain notes that there is a disconnect between what the stock prices are doing and what the fundamental insurance businesses are reflecting, as they generally have healthy balance sheets.
“When I look at the strength of the balance sheets, they are all running capital ratios in the 200 per cents or above, generally speaking, and that's very strong. And actually, the capital coverage ratios have been helped by rising bond yields.
“In terms of the actual credit risk, we haven't really seen any credit migration on the corporate bonds or the holding on the asset side of their balance sheets. There haven't been any material downgrades, no raw material credit migration, and no real defaults on the asset side.
“Even if that is coming as the market predicts, generally speaking, [insurers] have set aside enough reserves. That's why I feel there's a disconnect between what the market or the stock prices have done and what the fundamentals are reflecting.”
The business case and regulation
Regulation and the increased focus on premiums have also been driving consolidation, according to Alan Lakey, founder and director of CI Expert.
