But don’t expect short-term returns – you need to be in it for the long-term, says rating agency

Insurers should brace themselves for a wave of consolidation this year, Moody’s said this week.

The rating agency expected mergers and acquisitions (M&A) to be driven by Solvency II, the quest for growth in sluggish markets, and the restructuring in financial groups to meet EU competition rules.

Its report, M&A is back on the agenda for the European insurance sector, predicted consolidation in both life and general insurance.

“The relative stabilisation of capital markets and the aforementioned drivers will provide scope for consolidation,” it said.

“The management teams of major insurers, who had dedicated a considerable amount of time towards protecting companies’ balance sheets from the volatility of capital markets, are now adjusting and preparing for a new competitive environment.”

Focusing on potential acquisitions, Moody’s said that RBS Insurance will have little trouble attracting bidders, describing Direct Line as having a strong brand and “one of the industry leaders on cost”.

The Royal Bank of Scotland (RBS) has said that it will give up its insurance arm by 2012 to comply with EU competition rules. Meanwhile, ING’s insurance arm, which has about 6% of its business in general insurance, will also be sold to comply with EU rules.

Explaining why Solvency II will drive acquisitions, the rating agency said: “We expect some consolidation or acquisition by larger groups of those small and medium-sized companies that may have limited ability to raise new capital to meet the new, more burdensome, capital requirement of Solvency II and/or lack risk management expertise.”

However, Moody’s stressed that M&A would not provide short-term benefits.

“Generally, we view M&A activity as a negative credit event over the short-term, due to the integration risk and capital impact associated with the transaction. Nevertheless, in the medium-to-long term, we may hold a more positive view once the risks of execution have faded, capital is replenished and franchise is strengthened.

“In Moody’s opinion, the continuous stabilisation of the financial market is clearly a pre-condition for a healthy return to growth in insurance M&A across Europe,” the report said.