Mergers & Acquisitions: Bucking the trend


As the market weighs up the value of assets such as Groupama and Brit’s UK arms, deal making by insurers appears to be buoyant, especially when compared to other 
industry sectors. But is 
this a trend that is 
set to continue?

Along with other industries, strategic merger and acquisition activity within the insurance market went into decline immediately after the onset of the financial crisis. With economies in recession and balance sheets depleted, management teams are keen to avoid any activity — particularly M&A — that might threaten or create uncertainty over capital positions.

Even when good opportunities have been identified, many have fallen at the first hurdle, either due to a lack of available funding or a mismatch in pricing expectations between buyers and sellers.

However, 2011 saw deal activity in the insurance industry pick up sharply in contrast to most other sectors where global M&A activity continued to stagnate. So, why exactly is deal making in the insurance industry bucking the trend?

Clyde & Co’s analysis of the 50 biggest deals by value in 2011 reveals that 29% were driven by the fallout from the financial crisis, particularly disposals of assets by insurers looking to repay government bail-outs, shore up their balance sheets or forced sales by regulators.

This trend is repeated across the globe — most notably the sale by AIG of its life insurance businesses, particularly American Life Insurance Company and AIA Group. In the UK, there is the impending sale by Royal Bank of Scotland of its insurance subsidiaries by 2013.

Divesting non-core assets
Banking groups are also being forced to divest non-core assets due to economic circumstance or in order to comply with government conditions attached to bailouts. This year ING Group sold its Latin American insurance unit to Columbia’s Grupo de Inversiones Suramericana for $3.9bn (£2.5bn).

The on-going soft market and economic stagnation in more developed economies means insurers are looking further afield for growth. The desire to enter or exit the market in a particular country accounted for almost a third of deals by value, as insurers consider opportunities in both developed and emerging economies. For example, the acquisition of Axa Asia Pacific by AMP helped their move into Asia, while RSA’s purchase of Al Ahlia Insurance in Oman consolidates its market position in the Middle East.

In February 2010, Zurich Financial Services agreed to pay $2.1bn for 51% of Banco Santander’s insurance businesses across Brazil, Mexico, Chile, Argentina and Uruguay. In many of the emerging nations, there is also a trend towards consolidation as the markets reach new levels of maturity.

Earlier stages of development tended to see numerous start-ups in the insurance sector — not all of which had the critical mass to survive going forward. In many markets, therefore, a wave of merger activity is predicted to create fewer, stronger businesses.

Growing understanding
There is also strong evidence that — almost irrespective of geography — there is a growing understanding that insurers need to build scale in order to strengthen their balance sheets and sustain their margins.

This trend is exacerbated by an ongoing soft market in more mature economies — insurers are looking to gain cost synergies and spread them over an increased premium income. Examples of this trend include the merger of Nipponkoa and Sompo in Japan in 2010, which was designed to consolidate market position in an industry beset by stagnant premiums. Businesses with effective management and underwriting teams, able to deliver consistently strong returns, are well positioned in this trend, as the view of many shareholders is they would prefer better or more focused management teams to look after bigger businesses.

Worries about counterparty risk have also meant a trend to consolidation in the reinsurance space. The desire to increase scale further will undoubtedly drive businesses to look at strategic deals.

The imminent arrival of Solvency II in Europe and its equivalents elsewhere will mean an increased focus on capital requirements and a review by reinsurers and insurers of both their books of business, live and in run-off, and the capital they require.

This will undoubtedly trigger a range of corporate activity from capital raising to sales and purchases. Analysis reveals that 20% of the top 50 deals in the past year were bolt-ons, as companies sought broader service lines, while 15% were driven by consolidation.

Businesses are also looking to add on something different in terms of risk to diversify their profile, both through the acquisitions of shares and business swaps or reinsurance-type deals with an effective exchanging of risk in order to diversify. There will be a lot more of these innovative deals driven by a need for capital efficiency.

For historical reasons, some insurance groups have also created underwriting platforms in a number of different 
jurisdictions — all affected by Solvency II — and to continue with each of them will lead to capital inefficiencies. Therefore, a number of restructurings taking place where aspects of regulatory, tax and capital regimes are being assessed to find the most efficient single platform. The almost inevitable result of this is that a disposal programme to achieve the optimal capital position — so that renewal rights or individual books of business are put up for sale.

Change in sentiment
Another further driver for deal activity in the sector is the marked change in sentiment among the private equity community towards the insurance industry. In a recent survey of institutional investors more than 90% of respondents predicted an increase in private equity activity in the financial services sector, particularly insurance and banking. Up until recently, PE firms found insurance difficult to understand and this deterred investment intentions. Today, they are willing to consider both underwriting and intermediary businesses in the sector.

The strong base of niche companies is at the heart of PE’s attraction to the sector, for example, insuring thoroughbred horses or ship hulls or offering professional indemnity to specific sectors. There are more than enough of these opportunities to keep the private sector interested. The challenge is to find models that are extendable. Niche companies are the right size and are mainly priced in the range of tens of millions of pounds rather than hundreds. This means that the average private equity fund will be able to afford one as part of a mixed portfolio.

All of these factors combine to create a climate in which transactions are likely to continue to flourish. Some concerns remain, most notably around the on-going economic uncertainty, which may give boards pause for thought, particularly in the Eurozone, but the trend towards increased M&A activity is set to continue in the coming years as regulators and customers look for strength and stability in the risk transfer business.

Andrew Holdernes is global head of corporate insurance, Clyde & Co and Peter Allen is head of financial services, Grant Thornton.

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