Insurance deals m&a

In the short- to medium-term, low profitability will have a critical effect. Weak profitability is closely linked to low investment yields Figure 3 , and is encouraging insurers in mature markets to seek domestic deal synergies and to plan international expansion. Set against that, low profitability is making it hard for many firms to raise capital. Many institutional investors would currently prefer insurers to concentrate on existing franchises rather than strategic deal-making. This is creating an atmosphere of risk-aversion where dividends are often more prized than future expansion.

1. Change in Control

Weak profitability is closely linked to low investment yields, and is encouraging insurers in mature markets to seek domestic deal synergies and to plan international expansion. Economic themes include the shift of power away from developed economies, the threat of a renewed recession in Europe and the chance of market volatility creating deal opportunities.

General insurers around the world face some common challenges. Aggressive competition, higher claims and weak investment yields are putting profitability under pressure. Many general insurers are investing internally in intelligent pricing, but there will be increasing scope for firms to accelerate their progress by acquiring further expertise and proven platforms. Scale will remain a strategic priority in many mature markets….

In the US, where the growing cost of regulations such as Dodd-Frank are giving the appeal of scale a further boost, state regulators are unlikely to hinder the emergence of larger, financially stronger players. In Europe, tough market conditions and rising compliance costs are also putting a premium on economies of scale. Non-core disposals by European banks and insurers will generate a stream of bolt-on targets for acquirers, but some general insurers will be prevented from making acquisitions by limited capital.

Fragmented markets are likely to see smaller insurers merging in the search for scale. Despite the comparatively rapid growth of Asia-Pacific general insurance, the dominance of motor means that profitability pressures are growing in a number of markets. General insurers that have already achieved economies of scale are increasingly turning to smarter pricing to improve their profitability.

One is to develop the dynamic pricing capabilities needed to achieve profitable growth through aggregator websites and other electronic distribution channels. Another is to make greater use of telematics to aid pricing. Insurers with capital to spare will continue to target Asia and Latin America. Even so, better capitalised firms in Europe and North America will continue to follow established routes into emerging markets in Asia-Pacific or Latin America. Although expansion brings opportunities for growth, global insurers will need to guard against the potential risks that arise from greater complexity.

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Successful transactions between regions will need to balance the desire for geographic enlargement with effective central oversight and control. Regional growth opportunities will also become more sought after. General insurers facing slow growth in their home markets will also become increasingly alert to less mature markets closer to home. In Asia, Japanese insurers — recently active as international bidders — will be joined by others seeking intraregional expansion.

Accelerated evolution in M&A in the Insurance industry - KPMG Global

This process will be helped by the proximity of mature territories like Singapore and Hong Kong to faster growing markets such as Malaysia and China. Similar patterns will emerge in Europe. As international firms develop regional networks, physical and cultural proximity could help to deliver lower costs as well as higher growth. In time, we expect the ability to derive insights from big data to be a key differentiator of success in personal lines.

Life insurance markets often have unique features, but life companies face many of the same challenges as general insurers. Premiums in mature markets are expected to return to modest growth from , but low yields are squeezing profitability. Capital is also under pressure from progressively tougher solvency requirements. The picture in emerging markets is much more positive. Premium growth remains strong, and should improve further in Asia-Pacific, following a period of regulatory upheaval in China and India.

As in general insurance, the desire to build scale will remain a popular strategy for life insurers in developed markets. In-market deals will reshape the mortality and annuity markets, as insurers search for cost synergies and the benefits of diversification.

North America

Recent transactions have involved a range of listed and mutual life insurers, underlining the scope for consolidation. Private equity firms will play a growing role in US deals. Sales by foreign insurers may also help private equity funds to expand their exposure to US life insurance. Private equity firms will increasingly use their investment expertise to mitigate the effect of low interest rates and improve the spreads of fixed and indexed annuity portfolios.

There are also growing signs of interest from private equity bidders in books of variable annuities.

Insurance M&A

Many large life insurers would like to remove these contracts from their balance sheets, especially where reinsurance is costly or unavailable. Private equity investors could be more willing to take a long-term view, attracted by the potential to make a capital gain when interest rates pick up. If capital pressures are important in the US, they are doubly so in Europe. Solvency II will not be implemented until at the earliest, but it will continue to encourage restructuring. This will apply particularly to firms whose ratings are under pressure from writedowns on Southern European government debt, guarantees issued before the financial crisis, or investments in distressed real estate markets.

But who are the potential buyers? Despite the scope for synergy gains, limited capital will prevent many domestic rivals from acting as consolidators. As in the US, private equity could become more interested in back books of annuities, currently clogging balance sheets. Looking ahead, there is potential for more inbound Western European deals. Low valuations in Europe could also represent an investment opportunity for buyers willing to take a longer-term view of the European sector.

The gradual introduction of more stringent regulation, especially in South-East Asian markets such as Indonesia, Thailand and Vietnam will further stimulate deals. Bidders will include a handful of well-capitalised global insurers, but local groups will be increasingly active.

The next major Asian life insurers are likely to emerge from within the region. The gradual ageing of Asian populations — a major theme in Japan, and an emerging one in Korea and China — will also drive transactions. Asia-Pacific firms may also make acquisitions in developed markets to increase their capabilities in long-term savings or pension products. Competition for Latin American targets will remain high. Instead, they will have to compete over businesses divested by other foreign groups.

We explore Latin American life markets further. Western European markets such as France and the Netherlands offer the chance for investors to create value by improving the back-office efficiency of businesses in run-off. It may even be possible for consolidators with a proven track record to roll up closed book acquisitions across several European markets, especially for similar types of product.

In the medium-term, emerging regions such as Asia-Pacific or Latin America offer much less scope for closed book consolidation than Europe. Run-off businesses in these markets are much smaller and insurers are typically more profitable and better capitalised. Even so, the potential for run-off deals in comparatively mature markets such as Korea and Chile will only increase in the longer term. Changing attitudes to banking distribution will stimulate deals around the world.

A combination of factors including regulatory rulings, strategic reviews and the anticipated effects of Basel III and Solvency II will keep encouraging banks to reduce their insurance assets and insurers to reassess banking joint ventures. This trend will continue to stimulate disposals in markets including France, Spain and the UK. However, banks and life insurers in Italy will remain tied together by existing new business guarantees.

There is a sense that Latin America represents the last major untapped growth opportunity the industry is likely to see for the forseeable future.

Category: M&A Summary

If there is one region currently generating more debate than any other in the life insurance industry, it is Latin America. Premium growth has been consistently strong over recent years Figure 4 , and this is expected to continue. There is a sense that Latin America represents the last major untapped growth opportunity the industry is likely to see for the foreseeable future.

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Faced with slow growth in their home markets, life, general and composite insurers from North America and Europe are particularly keen to increase their exposure to Latin America. The Chilean life industry is large and well-established, and countries such as Columbia and Peru offer exciting potential too. International groups have some potential advantages as market entrants. This offers international groups a chance to leverage their experience in more sophisticated markets. International groups may also benefit from a lower cost of capital than local players.

Regulatory attitudes to reputable international buyers are typically neutral.

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