NN Group takeover of Delta Lloyd could lead to rise in M&A activity

NN Group's  takeover approach to Delta Lloyd reinforces Fitch Ratings' expectation that M&A insurance activity in Europe will accelerate, as well-capitalised firms seek growth through acquisition of rivals hit harder by Solvency II.

The ratings agency reported that Delta Lloyd, which has rejected the approach, was particularly heavily affected by Solvency II due to the combination of its business mix and capital management strategy with a relatively tough stance on implementation by the Dutch regulator.

“This drove a sharp decline in the insurer's share price as it had to raise fresh cash through a rights issue. NN Group's strong capitalisation makes it well placed to realise further capital benefits by expanding its Dutch market position,” said Fitch.

CreditSights analysts, who see Delta Lloyd’s economic value at €5.2 billion as opposed to the proposal valuing it at €2.4 billion, expect NN Group to return with a revised offer.

“Saturated markets in most big European countries and generally weak profitability make organic growth difficult and mean buying market share is likely to be an attractive option for some insurers. The firms' capital calculations can also benefit from diversification under Solvency II, meaning the combined solvency position following an acquisition could be significantly higher than a simple weighted average of the two firms' Solvency II ratios.

“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 Solvency II ratios weaken.”

“We believe that the benefits to NN's credit profile from improved market position, capital synergies and cost efficiencies following an acquisition of Delta Lloyd would broadly balance the negative factors, including higher leverage. We therefore would not have expected a deal based on the terms of the rejected approach to affect the firm's 'A+'/Stable rating. But if a revised offer led us to expect NN's financial leverage ratio would be above 30 percent for a sustained period this could put downward pressure on NN's ratings,” Fitch concluded.