Mergers and acquisitions continue to stall as Cobra calls off sale.
The Confederation of British Industry’s assertion this week that forecasters had, during the last 12 months, been “overoptimistic” about the outlook for the economy will have made insurers and brokers’ hearts sink a little further. Richard Lambert, the CBI’s director general, highlighted the example of the Bank of England’s prediction in July of last year that inflation would remain at around 1.9 per cent until 2010 – it is now expected that inflation will peak at around five per cent later this year.
With a nod in the direction of the insurance industry, Lambert also said that the financial services sector – which has been one of the main drivers of economic growth in recent years – was now facing “harsher times” as a result of the credit crunch.
Among the repercussions of the insurance industry falling on hard times will be a dramatic decrease in mergers and acquisitions in the sector. There are already indications that insurance brokers may be less reluctant to do deals – this week Cobra confirmed that it had ended discussions with a potential buyer after receiving an approach last month.
Any nervousness among insurers and brokers about pressing ahead with acquisitions will be exacerbated by the current climate of writedowns, falling profits, and, in some cases, losses – for example, IAG announced last month that it was anticipating a loss of £136m due to a £169m writedown of its UK book. Meanwhile, big falls in share prices has a negative impact on insurers capitalisation, meaning they are more likely to be cautious about splashing out to acquire a rival company.
A.M. Best anticipates that M&A activity could drop by as much as 50 per cent. Vasilis Katsipif, general manager at AM Best, said this week that deals would be unlikely in the short term because potential buyers would find it difficult to “raise the additional capital” in the current climate.
But the lack of M&A deals being completed is not necessarily a bad thing. There is a feeling in some quarters that companies have been overvalued over the last two to three years, and that there is a realignment taking place. That said, the situation could easily change. If share prices were to rise, the market’s appetite for M&A would quickly return.
