Welcome to our fourth annual report on mergers and acquisitions (M&A) activity in the global re/insurance market. Based on data supplied for completed transactions between July 2013 and June 2014 by Thomson Reuters, our global team of corporate insurance specialists offer their views of key trends in each of their regions. Volume of deals globally: January 2009 - June 2014 After a three year slide, activity in the sector appears to be recovering – with a small uptick in the number of deals completed in the first half of 2014. Most of the growth appears to be driven by Europe, with all the other regions broadly flat. A number of environmental factors that were identified last year as being critical to creating M&A activity have not yet happened; for example there is still considerable excess capital in the market, the pricing cycle is stubbornly soft (other than in the aviation sector due to recent events) and the Eurozone remains fragile. Nevertheless, there have certainly been more deals, and there is a sense of renewed energy around transactions across the re/insurance market. There has been a significant regional shift over the last year. Historically, the US has dominated in terms of overall share of transactions – an entirely natural consequence given the size and maturity of the world’s leading re/insurance market. However, the last 12 months have seen Europe take pole position in the number of transactions completed. Contributing factors to the comparative inactivity in the US appear to include differing buyer/seller perceptions of company value, ongoing regulatory uncertainty, mediocre economic performance, and some companies’ preference to reinvest excess capital into the business or to satisfy shareholders with stock buybacks and dividends. Europe has, however, taken on a more positive aspect over the last 12 months. While the second half of 2013 saw a marginal pickup in activity, in the first half of 2014 the market gained considerable confidence and momentum. Last year the market was still beset with a number of different uncertainties around issues such as regulation (e.g. the timing and form of Solvency II) and whether there was a likely improvement in the overall economic picture. While many of these uncertainties remain, some key economies are showing signs of sustained recovery. In this environment, many re/insurance businesses are looking carefully at their structure to ensure that they can take advantage of any upturn. Across Asia Pacific, levels of deal activity have been relatively stable, with 60 deals in total in the last 12 months, compared to 57 the year before. However, this is probably not an entirely accurate reflection of the level of interest in the region, which remains keen; with global re/insurers, regional players and private equity houses all looking at the growth potential available. The Middle East and Africa (MEA) span a range of markets at different stages of development, both economically and in terms of the insurance industry. The story of M&A activity over the last 12 months reflects those differences. Overall, the number of transactions has risen to 17 in the period from June 2013 to July 2014, compared to seven in the prior year. However, while activity in the Gulf Cooperation Council (GCC) has been limited, emerging economies such as Turkey and Morocco have seen a number of deals, and a significant spike in transactions elsewhere in Africa suggests that the insurance industry could be waking up to the continent’s huge promise. Executive summary 2 Volume of deals globally: January 2009 - June 2014 Global trends There are a number of different themes that resonate across all the regions in which we are active and where we reviewed the data. These include: – Disposals – either ongoing fallout from the global financial crisis or from problems that have occurred during normal operations. – International expansion – foreign investors looking for growth opportunities outside their own, often stagnant, domestic markets. – Regulatory changes – often driven by a desire for fewer, stronger insurers. Disposals There is no doubt that disposal of selected assets has been a key catalyst for insurance transactions in the last several years. Overall, businesses are seeking to sell non-core and/or sub-scale assets, either as part of a turnaround programme or in response to action by regulators. International expansion As illustrated by the chart over the page, re/insurers are still actively seeking opportunities for growth beyond both their domestic and regional markets. Typically, US businesses look south to Latin America for their deal flow, while European businesses have travelled east to Asia. Increasingly however, re/insurers from developing economies are looking to expand their businesses in the more mature markets. The acquisition of Antares’ Lloyd’s business by the Qatar Insurance Company illustrates their search for a platform for expansion, and Brazil’s Grupo BTG Pactual S.A. has announced plans to buy reinsurer Ariel Re to expand its presence in the property and casualty industry outside of the local market. There is no doubt that, while the vast majority of deals are still domestic, the dominant trend is a search for growth – either by buying market share or diversifying through acquisition into new sectors or distribution channels. Regulatory changes Another long term trend in almost every region is regulatory reform. The desire of regulators is to build businesses that understand the risks they are writing, hold the appropriate levels of capital, and have strong balance sheets. Last year has seen more granularity around the implementation of Solvency II in Europe, which will help management to decide on the future shape and size of their businesses going forward. Regulators in the Middle East and Asia are taking similar steps to strengthen solvency and encourage consolidation. A number have expressed the view that there are too many participants in their markets, indicating that new licences will not be issued or, at the very least, new entrants will be encouraged to enter local markets through acquisition rather than new start-ups. 0 10 20 30 40 50 60 H1 2009 H2 2009 H1 2010 H2 2010 H1 2011 H2 2011 H1 2012 H2 2012 H1 2013 H2 2013 H1 2014 Americas Europe APAC MEA3 Direction of travel - % of outbound deals Looking forward Probably the most powerful trigger for M&A activity in the coming year is the excess capital overhanging the sector. Shareholders are looking for decent returns on their investments and, if management cannot deliver this operationally, then there will be pressure either to return it or deploy it elsewhere. The key challenge is for those companies that cannot demonstrate underwriting excellence or are unable to scale up and move into different markets to acquire new business. In the absence of a catastrophic event causing significant balance sheet damage, and with rates having trended downwards steadily over the last several years, re/insurers have become even more active in their search for alternative strategies. In addition, size appears to be becoming increasingly important – and balance sheet strength seen as being critical to clients. If this is the case, then strategic mergers and acquisitions will be driven by the desire to reach optimal scale and relevance. Andrew Holderness Global Head of Corporate Insurance4 North America The overall level of insurance transactions in North America over the last five years shows activity peaking in 2011, and then trending steadily downward. Historically, the US has dominated in terms of overall share of M&A in the industry – an entirely natural consequence given the size and maturity of the world’s leading re/ insurance market. However, the last 12 months have seen a significant shift in that Europe has taken pole position in the volume of transactions completed.Volume of deals in the USA: January 2009 - June 2014 Contributing factors to this downwards trend appear to include differing buyer/seller perceptions of company value, ongoing regulatory uncertainty, mediocre economic performance, and some companies’ preference to reinvest excess capital into the business or to satisfy shareholders with stock buybacks and dividends. In the case of the regulatory environment – particularly in the US – the efforts by regulators to identify Systemically Important Financial Institutions (SIFIs), and the fact that the criteria for these is still evolving and subject to change, creates an environment which may cause acquirers to pause for thought . This is particularly key if a potential deal increases the size and profile of the combined entity so it can be deemed to be a SIFI, thus making it subject to a layer of federal regulation with more stringent transparency requirements, restrictions on capital and consumer protection. The bottom of the market was reached in the second half of 2013, and activity picked up slightly in the first half of 2014. The expectation is that, as some of the factors listed above develop, so momentum may continue to build for increased M&A in the North American insurance market. GDP growth is particularly critical in stimulating or dampening M&A activity depending on a business’ particular circumstances. At the same time, the faster than expected growth in US GDP in the second quarter of 2014 may signal a return to a macro-economic environment that could stimulate expansion through M&A. In addition, the consistent rise in the US stock markets over the last 12 months may lead firms to conclude that valuations are back at levels at which they would consider a sale and, therefore, increase the number of management teams willing to consider an offer. 0 20 40 60 80 100 120 H1 2009 H2 2009 H1 2010 H2 2010 H1 2011 H2 2011 H1 2012 H2 2012 H1 2013 H2 2013 H1 2014 0 20 40 60 80 100 120 H1 2009 H2 2009 H1 2010 H2 2010 H1 2011 H2 2011 H1 2012 H2 2012 H1 2013 H2 2013 H1 2014 United States Canada Bermuda 5 Deals by country in North America: January 2009 - June 20146 Home or away? There is no doubt that the soft pricing cycle and a sluggish economic environment in North America means that some large insurers have considered their domestic markets to be less attractive from an investment perspective than M&A in emerging economies. In Latin America and South East Asia, the prospects for growth make acquisitions or joint ventures much more attractive. Examples include Metlife Inc.’s acquisition of Chilean pension manager AFP Provida S.A. for USD 2 billion and its proposed strategic partnership involving AmLife Insurance Berhad and AmFamily Takaful Berhad in Malaysia. ACE continued its growth in emerging markets in the last year, having seen a strong performance from its Latin American subsidiaries. “Growth was particularly strong from North America, Asia and Latin America, where our new acquisitions in Mexico are already contributing and added to the region’s strong results,” CEO Evan Greenberg said in the company’s earnings release in July 2013. In January 2014, ACE announced that the company and its local partner have reached a conditional agreement to purchase a 60.9% stake in The Siam Commercial Samaggi Insurance PCL, a general insurance company in Thailand, from Siam Commercial Bank. Closer to home, The Travelers Companies Inc. agreed to acquire The Dominion of Canada General Insurance Co. from E-L Financial Corp. Limited for approximately USD 1.1 billion in cash in November 2013. “This transaction is consistent with our strategy to make thoughtful investments in attractive markets outside the United States,” said Jay Fishman, chairman and CEO of Travelers. This deal was seen to give Travelers immediate scale in Canada, where laws are fairly similar, a lot of the customers overlap, and there is a shared language. However, the largest deal of the period worldwide was domestic, involving two US entities: the purchase by Fidelity National Financial of mortgage technology and service provider Lender Processing Services for USD 4.1 billion. FNF Chairman William P. Foley, II. commented that “This combination creates a larger, broader, more diversified and recurring revenue base for FNF.” Direction of travel - % of outbound deals7 Advancing in increments Indeed, the majority of deals in the US and Canada in the last 12 months were domestic rather than international, and the main drivers appear to be a desire to achieve income growth incrementally through accessing new products, customers or channels. These deals have tended to be bolt-on acquisitions involving middle market targets rather than transformative mergers. Partly this is because big players need big targets to create a transaction that moves the EPS needle, and these targets are few and far between. Disposals also continued to drive M&A activity in the last 12 months. The sale of Aviva USA to Athene Holdings is a clear example of this trend. Aviva had pledged to exit 16 businesses, totalling GBP 6 billion of capital, to rebuild its reserves after the European sovereign debt crisis. “The sale of Aviva USA is an important step forward in the delivery of our strategic plan. It considerably strengthens Aviva’s financial position, increases group liquidity and improves our economic capital surplus, whilst also reducing its volatility,” Chairman John McFarlane said in a statement. In the coming months, other companies are likely to look to divest assets with QBE, for example, putting its US midmarket business up for sale after a marked deterioration in operating performance. The ongoing low interest rate environment has also meant that a number of insurers have sought to dispose of life and annuities assets. The acquisition of Lincoln Benefit Life Company by Resolution Life Holdings Inc. is an example of this trend. More unusually, it is the first foray of a UK life insurer into the US buying a business that is in runoff, or is no longer selling new policies. Other examples include AXA’s agreed sale in April 2013 of its US life unit to Protective Life Corp. as part of a USD 1.1 billion transaction. Protective Life Corp agreed to buy a portfolio of old policies from the French insurer with the aim of squeezing more value out of them, saying the deal “should produce a steady income stream and increase earnings per share.” Canada’s Sun Life Financial Inc. also struck a deal last year to sell a US annuity business for USD 1.4 billion to a firm owned by Guggenheim Partners LLC shareholders. Consolidation almost inevitable Activity in Bermuda typifies the trend towards consolidation which is being seen across the global re/ insurance industry. At the centre of this lies the excess capital that is overhanging the sector. Shareholders are looking for decent returns on their investments and, if management cannot deliver this operationally, then they are being challenged either to return it or deploy it elsewhere. With rates having trended downwards steadily over the last several years, reinsurers on the island have looked closely for alternative strategies. Activity in the last 12 months has had a strong legacy sector tone. Continued activity in this area was illustrated by the purchase of run-off reinsurer Alea Group by legacy acquisition firm Catalina. Alea was a Kohlberg Kravis Roberts (KKR)-backed reinsurer that was forced into run-off in 2005, following a damaging downgrade by AM Best. Catalina’s founding CEO and Chairman Chris Fagan said: “We continue to see a significant level of deal flow in the non-life run-off sector across the US, Bermuda and Europe. Increasingly, more of the transactions are reinsurance or portfolio transfer deals for legacy liabilities.” This was Catalina’s second purchase this year after it agreed to buy American Safety Reinsurance in August 2013. In April 2014, Enstar Group and Stone Point Capital completed their USD 646 million cash and share acquisition of Torus from its backers First Reserve and Corsair. This was the largest live underwriting acquisition to date for Enstar and commenting on the closure of the deal, Enstar CEO Dominic Silvester said: “With our active underwriting operations complementing our core legacy business, we also look forward to many new opportunities in Enstar’s future.” The company’s strategic move into live underwriting is thought to be driven by a need to secure an additional revenue stream as the pool of asbestos, pollution and health business in run-off continues to dry up. While some have sought to re-deploy capital into new areas through acquisition, other Bermudan re/insurers have chosen to return capital to shareholders through dividend payments or share buybacks. Axis has been an active re-purchaser of shares and its CFO, Joseph The combination of regulatory uncertainty, sluggish economic growth and excess capital in the system being paid back to shareholders has slowed M&A activity. Doug Maag, New York8 Case study: MetLife - expanding into faster-growing markets MetLife Inc., the largest US life insurer, agreed to buy Chilean pension manager AFP Provida S.A. (Provida) from BBVA in a deal valued at about USD 2 billion to add fee income in Latin America. Chile’s economy is projected to expand by 4.5% this year, compared to US growth estimated at 2%, according to economists’ estimates compiled by Bloomberg. Low interest rates and slow economic growth have weighed on results at New York-based MetLife. MetLife is expanding in fastergrowing markets with the Provida deal, after acquiring American Life Insurance Co. in 2010 to build operations in Asia and Europe. Chief Executive Officer Steven Kandarian has set a goal of generating at least 20% of operating earnings from emerging markets by 2016. With the acquisition of Provida, MetLife’s operating earnings from emerging markets are expected to grow to about 17% from 14% currently, according to the statement. “MetLife is delivering on a key component of our strategy – expanding our presence in emerging markets,” Kandarian said in the statement. “The acquisition also supports our focus on shifting our business mix to less capital intensive products.” Henry, has said that it expects to continue this programme actively. Allied World also significantly increased its appetite for this type of transaction by approving a new USD 500 million share buyback authorisation in Q1 2014, which it expects to complete over the next two years. Bermuda reaching a tipping point While the overall volume of deal activity in Bermuda has not increased sharply this year, it is likely that the market is reaching a tipping point at which more M&A will be triggered. The key challenge is for companies that cannot demonstrate underwriting excellence, or are unable to scale up and move into different markets to acquire new business. Size appears to be becoming increasingly important – with some saying that between USD 5 billion and USD 8 billion in capital is required to be really relevant. If this is the case, then strategic mergers and acquisitions will be driven by the desire to reach optimal scale and relevance. Attention now turns to who might be next for acquisition, with the focus clearly on the smaller players like Lancashire, Platinum, Montpelier and Argo. Size appears to be becoming increasingly important, so strategic mergers and acquisitions will be driven by the desire to reach optimal scale and relevance. Martin Mankabady, London910 Latin America The last year has seen a range of economic and political factors impacting a number of countries in Latin America, many of which could have acted as a brake on mergers and acquisitions activity. Despite this the region has seen a spate of deals: in the period from July 2013 to June 2014 there were 16 transactions across the region, compared to 20 in the previous 12 months.Volume of deals in Latin America: January 2009 - June 2014 Hungry for growth – emerging market appeal Latin America is home to a number of dynamic emerging markets and analysis of recent in-bound deals shows a number of US-based insurers, in particular, looking to establish or strengthen a presence in the region. In one example, in June 2014 Cincinnati-based life insurer Ohio National Financial Services completed the acquisition of a 50% stake in Brazil’s Centauro Vida e Previdencia, building on recent expansions by the company into Chile and Peru. In a statement announcing the deal, which will ring true for many players looking towards the region, Ohio National’s CEO, Doc Huffman said: “There has been double-digit life insurance premium growth in every major Latin American market over the past five years. We believe that expansion into Latin America will provide us opportunity for even faster growth and is one of our key corporate objectives.” Elsewhere, other US-based companies that have made a move into the region in the last 12 months are Liberty Mutual Insurance Co, which acquired Mexican surety company Primero Fianzas for an undisclosed fee from Grupo Valores Operativos Monterrey, a private investor group, and New York-based Transatlantic Reinsurance Co’s acquisition of a 45% interest in Paraguayan insurance firm, El Sol del Paraguay Compania de Seguros y Reaseguros. However, in the largest deal of this type and one of the most sizeable worldwide during the period, MetLife Inc. acquired from BBVA a 64% stake in AFP Provida S.A., the largest private pension fund administrator in Chile, for a fee of just over USD 2 billion, in a deal which also included a small asset management business in Ecuador. Confirming the rationale behind the deal, Steven A. Kandarian, chairman, president and chief executive officer of MetLife said: “With this acquisition, MetLife is delivering on a key component of our strategy – expanding our presence in emerging markets. MetLife is a leader in both life insurance and annuities in Chile, and Provida will further strengthen our position by adding the country’s top pension franchise. The acquisition also supports our focus on shifting our business mix to less capital intensive products. We expect it to be immediately accretive to earnings.” European insurers have also been involved in M&A activity in Latin America. In another significant move into Brazil, Swiss Re acquired an 11.1% stake in SulAmerica S.A., the country’s largest independent insurance group, for USD 334 million. Meanwhile, in Colombia, France’s AXA paid USD 347 million for a 51% stake in Colpatria Seguros, the country’s fourth largest player in the P&C and life segments, with a 7% market share. The deal underlines AXA’s ambitions in the region, following its acquisition of HSBC’s Mexican unit in 2012. 0 5 10 15 20 25 30 35 Brazil Chile Peru Argentina Colombia Mexico Cayman Islands British Virgin Islands Panama Puerto Rico Venezuela Bahamas Paraguay Trinidad & Tobago US Virgin Islands 1112 Direction of travel - % of inbound deals Deals in Latin America by country: 2012 - H1 2014 Domestic consolidation The other tranche of deals in the last year in Latin America have been domestic. These have, in part, been driven by regulatory pressure for fewer, stronger insurers leading to divestments in order to comply with changing capital requirements. In addition, disposals have resulted from shifts in strategy often in order to refocus on core businesses. Two of these deals were of significant size: the USD 858 million acquisition in Mexico of a stake in Seguros Pensiones Banorte by its compatriot Grupo Financiero Banorte-Ixe, the third largest financial group in the country, and the acquisition in Brazil of a 20.5% stake in IRB-Brasil Resseguros S.A. by BB Seguros Participacoes S.A. for USD 267 million. In Peru, the three deals in the insurance industry of the last 12 months can be seen as a direct consequence of the Insurance Contracts Act, which was passed into law at the end of 2012, and has generated significant cost increases for insurers as they seek to implement the necessary improvements in systems and procedures required under the new regulations. 2012 2013 H1 2014 Brazil Argentina Peru Colombia Chile Mexico 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.013 All of the deals involved units of Rimac International – one of the four large entities dominating the Peruvian market – the other three being Pacífico Vida, La Positiva, and Spain’s Mapfre. This concentration at the top end of the market, combined with the fact Peru has relatively few players in the industry (with 28 insurers and reinsurers registered at the beginning of 2013) means targets for future M&A activity may be limited. Although the insurance market in Chile remains relatively open to foreign companies, with potential entrants aided by a lack of regulatory barriers, the country has the highest insurance penetration in Latin America, which means there’s less potential to grow in the long term. The fact that there were no cross-border transactions involving Chilean entities in the last 12 months perhaps suggests an absence of attractive targets, at a price that would appeal to prospective purchasers. Those deals that have been done have been domestic, including the acquisition of a USD 170 million stake in Corp Group Vida Chile S.A. by Inversiones La Construccion S.A. These deals followed the announcement by the Chilean insurance regulatory agency, Superintendencia Valores y Seguros of its new risk-based capital model, which will bring with it a number of operational challenges that smaller players in particular may struggle to comply with; potentially leading to an increase in M&A. Further activity expected The stage is set for further transaction activity across the region. In what will be a significant deal, ACE has agreed to buy the property and casualty business of Brazilian bank ITAU – currently the country’s largest insurer – subject to contract conditions and regulatory approval. At the time of the announcement, ITAU said the sale was part of its strategy to focus on mass market insurance policies that are more associated with its core retail banking business. While there were no completed outbound deals involving Latin American re/insurers in the period from July 2013 to June 2014, this is by no means indicative of ambition or future trends. We are starting to see Latin American players with the scale, expertise and ambition to look further than their national borders for opportunities elsewhere in the region and beyond. For example, in September 2012, Peru’s El Pacifico Peruano Suiza Compania de Seguros y Reaseguros S.A. acquired a controlling 51% stake in Bolivia’s Crediseguro S.A. More recently, Brazil’s Grupo BTG Pactual S.A. – the largest independent investment bank in Latin America – announced plans to buy reinsurer Ariel Re for an undisclosed sum. According to a statement, Ariel Re will become the “cornerstone of BTG Pactual’s international reinsurance venture, which builds on the success of its London-based reinsurance principal investment business” as it bolsters its presence in the sector. BTG Pactual’s Chief Executive Officer André Esteves, said: “While current market conditions are clearly challenging, the opportunity to buy a best-in-class business with proven risk-discipline was too good to miss, as it offers an exceptional opportunity to expand our presence in the property and casualty industry outside of our local market.” As the pace of development and economic growth in the region continues, it is fuelling the rise of a new breed of large and ambitious Latin American businesses that are increasingly looking beyond their local and regional borders for opportunities. As they do so, they are demanding risk partners who understand international markets, the exposures they face and their product requirements. We are likely to see insurers from their domestic markets follow these high-growth companies across borders, particularly into markets where significant trading relationships already exist. One way they will look to do so will be via acquisition, which points to a future uptick in cross-border transactions. We are seeing Latin American players with the scale, expertise and ambition to look beyond their national borders for opportunities. Stirling Leech, Sao Paulo14 Case study: Swiss Re – the lure of Latin America Latin America is rich with potential and international players from around the world are looking at either establishing a foothold or strengthening a presence in one or more markets across the region. In one such deal – that was also driven by the need of the seller, ING, to make a strategic disposal – Swiss Re acquired a stake in Brazil’s SulAmérica S.A. SulAmérica is the largest independent insurance group in the country and a leading provider of health and auto insurance. The company also offers property, casualty, and life insurance as well as pension, asset management and premium savings bonds products. The investment is an affirmation of Swiss Re’s strategy to invest in leading insurance franchises in high growth markets – an approach they are not alone in pursuing. In a press release, Swiss Re’s Group Chief Executive Officer Michel M. Liès said: “SulAmérica is a well-established and successful multiline insurer where we see attractive growth opportunities. We expect our investment to benefit us not only financially, but also by increasing our proximity to and participation in the Brazilian market.” Markets to watch However, we expect higher levels of M&A of all types. With more than 100 insurance companies the Brazilian market remains ripe for consolidation. Although the Federal Election in 2014 may inject a note of caution into those considering an acquisition, the solid fundamentals of the market will continue to drive interest. Brazil’s insurance sector is one of the world’s most dynamic. It has seen a decade of significant growth, fuelled by strong economic development, expanding broker channels and the rise of lines including motor and property. The Brazilian market is predicted to grow in the region of 7-10% a year for the next few years, with continued real GDP growth supporting the demand for insurance products. Mexico is currently worth more than USD 20 billion in premium, second only in Latin America to Brazil, and shares a number of characteristics that point towards on-going deal-making. The country remains an underpenetrated insurance market and its potential is underpinned by a strong economic outlook, a relatively youthful population, and a rapidly growing middle class, which now comprises 50% of Mexico’s population, compared with 80% living in poverty in 1960. A government drive to invest in infrastructure will create further opportunities for insurers. Under the National Infrastructure Plan for 2013-2018, the Mexican Government will spend USD 400 billion on projects in sectors including energy, tourism, transport, water and urban development. This will bring opportunities for foreign insurance and reinsurance as there is not currently sufficient capacity in the domestic market to carry the large risks that these projects will entail. A number of US-based insurers, in particular, are looking to establish or strengthen a presence in the region. Stirling Leech, Sao Paulo1516 Asia Pacific In the last few years, in contrast to other regions around the world, the volume of M&A activity in the insurance industry in Asia Pacific (APAC) has remained comparatively steady. This pattern continued in the year from July 2013 to June 2014, with an uptick in deals in the second six months. Overall across the 12-month period there were 60 transactions compared to 66 the year before and the region accounted for 18% of deals on a global basis. Given the size and diversity of the region, it is not surprising that a range of factors were at play in driving these deals.Volume of deals in APAC: January 2009 - June 2014 Entering new markets – the search for growth With soft pricing persisting in many locations around the world and opportunities in mature insurance markets difficult to come by, diversification through acquisition into new sectors or distribution channels is a key driver of transaction activity in Asia Pacific. Increasing levels of GDP and improving insurance penetration rates are delivering premium growth across the region, benefiting both domestic and international insurers, and spurring those hungry for opportunities both from within Asia Pacific and beyond - either to build or strengthen their presence. Although interest in the region remains keen, a number of challenges continue to apply a hand brake to M&A activity. In particular, valuation is a potential roadblock, with sellers pricing aggressively based on the future growth potential of the industry in the region. Activity is also often stymied by difficulties around finding the right targets and limitations on investments in many markets. The lure of the tigers The rapid growth economies of Southeast Asia, in particular Indonesia, Malaysia and Thailand, remain attractive targets. The appeal of Malaysia lies in part with its relatively relaxed foreign ownership regulations – foreign investors can buy up to 70% of a domestic insurer – combined with strong economic potential and a growing population. In one transaction example, in April 2014, US insurer MetLife Inc. acquired 51% of AmLife Insurance Bhd., the insurance arm of Malaysia’s AMMB Holdings Bhd., for USD 256 million in a deal which also saw MetLife enter an exclusive 20-year agreement to sell insurance products through AMMB’s banking network. Commenting on the rationale behind the deal, Nirmala Menon, senior vice president at MetLife in Asia, pointed to the strong margins insurers enjoy in Malaysia, in part because licenses aren’t freely available for new entrants, and added: “Malaysia is an attractive market given the under-penetration of life insurance, a rising middle class and growing disposable incomes.” In another in-bound deal involving a US insurer, Prudential Financial Inc. completed the purchase of Uni.Asia Life Assurance Berhad for around USD 158 million as part of an investor group that included Bank Simpanan Nasional (BSN). Elsewhere, South Africa’s Sanlam Emerging Markets (Pty) bought a 51% stake in MCIS Zurich Insurance Bhd for around USD 118 million confirming its strategy to pursue value accretive growth opportunities in South East Asia region. The deal follows Sanlam’s acquisition of a 49% stake in the Malaysian niche short-term insurer Pacific & Orient Insurance Co. Berhad (POI) in May 2013. The region’s stand out performer Despite uncertainty in Indonesia generated by this year’s general election, the country has remained on the radar of international insurers. In-bound deals in the last 12 months include two from Japan - Dai-ichi Life Insurance agreeing to pay more than USD 300 million for a 40% stake in Panin Life and Meiji Yasuda Life Insurance Co. acquiring a stake in Avrist Assurance PT – and Spain’s Mapfre S.A. investing in Asuransi Bina Dana Arta Tbk PT. We expect interest in M&A in Indonesia from outside Asia Pacific to persist. In a region that offers promising growth for the insurance industry, the country is widely held to be a stand-out market with some staggering metrics. Premiums are increasing 11% year-on-year – five times the growth rate of Europe or the US. Life products reported a 37% annual rise in early 2012, and one major European insurer recently reported a 100% annual growth rate in premiums. Although these numbers can only be achieved from a low base – penetration rates are around just 5% – they remain impressive. 0 10 20 30 40 50 60 H1 2009 H2 2009 H1 2010 H2 2010 H1 2011 H2 2011 H1 2012 H2 2012 H1 2013 H2 2013 H1 2014 1718 Direction of travel - % of inbound and outbound deals Markets to watch Thailand has seen a spate of recent deals including the acquisition by ACE of Siam Commercial Samaggi Insurance PCL. Investors from within the region have also made moves into the country including Singapore’s Phillip Securities Pte Ltd deal for Finansa Life Assurance Co Ltd. and the acquisition of Osotspa Insurance PCL by Malaysia’s Tune Ins Holdings Bhd. The fundamentals are in place for more M&A in Thailand although investors may inject a note of caution as they keep an eye on political developments following the military coup in the country in May 2014. After a dip in transaction activity, Vietnam appears to be back on the radars of international players. Three inbound deals during the period saw Australia’s Insurance Australia Group (IAG) increase its stake in AAA Assurance Corporation following an initial acquisition in 2012, Germany’s Ergo Versicherungsgruppe AG make an investment in GIC, and Firstland Co Ltd of Hong Kong buy into Bao Minh Insurance Corporation. With few untapped re/insurance markets remaining in Asia, and indeed around the world, recent developments in Myanmar – political reform, the lifting of sanctions and the granting of new insurance licences to private carriers – have sparked fresh interest in the country. Although in reality opportunities will be limited in the short term for the international re/insurance players; those that are looking to capitalise on the opportunity will need to move quickly to avoid being left behind, while being prepared to wait for a return on their investment. Interest in M&A in Indonesia is set to rise. This is a stand-out market in a region that offers promising growth. Ian Stewart, Singapore19 Deals in APAC by country: January 2009 - June 2014 Beyond borders There have been a number of interesting deals in the last 12 months where emerging market insurers have demonstrated their appetite to look for growth opportunities outside their home markets. In India, in October 2013, Shriram General Insurance purchased a large chunk of shares in Philippine non-life company Monarch Insurance in the first overseas insurance transaction by an Indian insurer following the regulator’s announcement in May 2013 that it was allowing domestic companies to do business in other countries. Meanwhile, via its insurance holding company Avicennia Capital Sdn Bhd, Khazanah Nasional Berhad – the Government of Malaysia’s strategic investment fund – bought a 90% stake in Turkey’s Acıbadem Sağlık ve Hayat Sigorta A , the country’s second largest provider of health insurance services for corporate and individual clients, for USD 252 million. Khazanah managing director Tan Sri Azman Mokhtar described the deal as: “An opportunity to invest in a quality asset and allows us to tap into the attractive growth opportunities offered by the Turkish insurance market.” In the biggest transaction of this type, China’s Fosun International Ltd bought an 80% stake in Portugal’s Caixa Geral de Depositos S.A.’s insurance unit for around USD 1.4 billion, beating out US buyout firm Apollo Management International LLP. Anecdotal evidence suggests that Australia may be another market on the radar of Chinese as well as Indian insurers after a number of enquiries about opportunities in the country. The industry is dominated by three big players - QBE, Suncorp and IAG - who between them control around 75% of the insurance market, so opportunities for domestic consolidation will be few. However, in the last 12 months IAG acquired the insurance underwriting businesses of Wesfarmers Limited for USD 1.6 billion in a deal which also saw it take control of Wesfarmers’ retail point of sale distribution channel, Coles. Indeed, access to distribution channels in the Australian market is likely spurring interest from foreign entities and M&A is expected in this space as consolidation takes place between small independent broking groups. We expect some consolidation in Australia to take place between small independent broking groups. Dean Carrigan, Sydney 0 10 20 30 40 50 60 70 80 Japan Australia South Korea Malaysia Indonesia China Hong Kong India Taiwan Sri Lanka Vietnam Philippines Thailand20 Regulating to consolidate Regulatory reforms are underway and will prove to be another key driver of transaction activity. Regulators in many markets are looking at the actions of the authorities in Europe and the US to strengthen insurer solvency and are taking similar steps in this direction. The desire is to build businesses that understand the risks they are writing, hold the appropriate levels of capital, and have strong balance sheets. A number of insurance regulators across the Asia Pacific region have expressed the view that there are too many participants and have either indicated that new licences will not be issued or, at the very least, new entrants will be encouraged to enter local markets through acquisition rather than new start-ups. Certainly, an increasing number of new players in the region have formed the view that notwithstanding pricing and other transaction hurdles, acquisition is the preferred market entry method. Developments in China China is a case in point. The majority of deals in the last 12 months involving Chinese players have been domestic. This includes the third largest transaction worldwide of the period; the acquisition by Anbang Insurance Group Inc. of a USD 2 billion stake in China Merchants Bank in a deal that some analysts speculated could be a step towards building a comprehensive financial platform that covers banking, insurance and securities. In terms of cross-border activity, in early 2014 French insurer AXA acquired a 50% stake in Tianping Auto Insurance Co Ltd. for a fee of around USD 631 million. This deal follows the opening of China’s third-party motor liability insurance market in 2012, a move that will spur more in-bound transactions. Indeed, M&A activity is likely to be further heightened by a number of other measures introduced over the last couple of years by the China Insurance Regulatory Commission (CIRC) designed to support the growth of the insurance market and close gaps in coverage. Perhaps most significant for the future volume of transactions was the rule brought in from 1 June 2014 that allows insurers in China – including Chinese-based foreign insurers and domestic insurers – for the first time to buy shares in more than one company operating in competing lines of business. This brings it in line with other competition laws now in place in the country. In addition, the way in which capital can be contributed is also changing; under the new rules companies will be permitted to use external debt to fund acquisitions, up to a limit of 50% of the overall price, subject to approval from the CIRC. The second half of 2014 is set to be an interesting time in the China market as the impact of these regulatory reforms starts to be felt in earnest. Indian market finally set to open up further The region’s other dominant market in terms of size and population – India – has for a number of years been in a holding pattern in terms of M&A activity. The last 12 months have seen a handful of deals in the country including a tie-up between the Industrial Investment Trust and Future Generali India Life Insurance – but these have been examples of share warehousing or investing to diversify the Indian holding base rather than “pure” M&A. However, recent regulatory developments indicate that the country could be about to see heightened levels of transaction activity. Most significantly in this regard, the National Democratic Alliance (NDA) government’s maiden budget was received with interest by insurance players operating joint ventures in India. In his speech, the Finance Minister acknowledged the fact that the insurance sector in the country has been starved of investment and that several segments of the industry need to grow. To address this, he indicated that the Insurance Laws (Amendment) Bill that has been pending for over five years will finally be considered by parliament. Insurers in China can now buy shares in more than one company operating in competing lines of business. Michael Cripps, Shanghai21 Case study: Hiscox – a doorway into Asia The USD 55 million acquisition in March by Hiscox, of global specialist insurance group, DirectAsia, allows them to tap into the growing demand for insurance of all kinds - from health to life and everything in between - in Asian markets, as governments deregulate the industry and open it up to private players. DirectAsia is the direct-toconsumer online business of insurance provider Whittington Group and was launched in 2010 as the first online retail insurance provider in Singapore. It expanded to Hong Kong two years later and to Thailand in 2013. It has more than 54,000 customers and wrote USD 25.3 million in premiums last year. The acquisition of DirectAsia gives Hiscox exposure to a whole new retail insurance market and a doorway into the fast-growing Asian region. Hiscox Chief Executive Bronek Masojada, said: “DirectAsia gives Hiscox a 21st century distribution platform in Asia that leapfrogs traditional routes to market. DirectAsia complements our direct-toconsumer businesses in Europe and the US and, in time, we will use it to distribute Hiscox products.” We expect the Bill to be passed by the end of August 2014 and that subsequently the existing ‘composite’ cap in the insurance sector will be increased to 49% from the current level of 26%, through the Foreign Investment Promotion Board route. Although all the details have yet to be finalised at the time of writing – for example, it is not clear whether the foreign investment cap would apply only to direct equity participation or also include indirect investment within its fold – it is evident that under the new rules management control in a cross-border joint venture will continue to remain with the Indian partner. While the new prime minister continues to have backing for his reform agenda, we might expect further such liberalisation moves, which will bring opportunities for insurance players in the Indian insurance market and serve as a driver for M&A. Disposals as a transaction driver We have seen that disposals, driven either by government intervention as a result of distress following the global financial crisis or as a strategic decision to divest non-core assets, have been a feature of transaction activity in some insurance markets in Europe and the Americas and there has been evidence of the same trend in Asia Pacific. For example, in Hong Kong an Asian investor group comprising RRJ Capital, Temasek, and SeaTown Holdings International, acquired a USD 1.8 billion stake in NN Group NV – the insurance arm of ING – ahead of its subsequent IPO. ING is continuing to restructure its business as it looks to meet the conditions of its bailout by the Dutch government in 2008. In another deal driven by the same factor, South Korea’s Life Investment Ltd bought ING Life’s assets in the country for USD 1.7 billion. Also in South Korea, NongHyup Financial Group Inc. acquired Woori Aviva Life Insurance as Aviva restructures its operations to relieve balance sheet pressure, which came to a head in 2012 when the company was forced to cut its dividends. Since then, as well as the divestment in South Korea, it has also disposed of non-core business in Turkey, the US and Italy, with the possibility of more similar actions to come. Aviva CEO Mark Wilson has reiterated that there is still a lot to do, and that the company remains “focused on cash flow, expense efficiency and the clinical allocation of capital to areas where we can maximise returns”. This could be indicative of an emerging trend. Since the financial crisis all businesses are operating in a more risk averse world. If more insurers opt to re-focus on their core businesses and put peripheral assets up for sale, the resulting increase in the supply of acquisition targets could drive a rise in M&A activity in the region. Government liberalisation moves will drive M&A activity in India. Vineet Anjela, New Delhi22 Europe Over the last 12 months, M&A activity in Europe has taken on a more positive aspect. While the second half of 2013 saw a marginal improvement in activity, the first half of 2014 saw the market gain considerable confidence and momentum. Europe even overtook the Americas to become the most active region for M&A transactions during the same period.Percentage share of global deal activity by region Last year the market was still beset with a number of different uncertainties around issues such as regulation (e.g. the timing and form of Solvency II) and whether there was likely to be an improvement in the overall economic picture. While many of these uncertainties remain, Solvency II now has more granularity around its implementation, and some key economies are showing signs of sustained recovery. In this environment, many re/insurance businesses are looking carefully at their structure to ensure that they can take advantage of any upturn. Despite an upturn in economic recovery across Europe, which has translated into improved levels of confidence, much of the M&A activity has been disposals in difficult circumstances. Some are still hangovers from the financial crisis, but others are driven by problems that have occurred during normal operations. Other strategic imperatives include international expansion into new territories by foreign investors looking for growth opportunities outside their own, often stagnant, domestic markets. 0 30 60 90 120 150 H1 2009 H2 2009 H1 2010 H2 2010 H1 2011 H2 2011 H1 2012 H2 2012 H1 2013 H2 2013 H1 2014 30 40 50 60 H1 2009 H2 2009 H1 2010 H2 2010 H1 2011 H2 2011 H1 2012 H2 2012 H1 2013 H2 2013 H1 2014 Americas Europe 23 Volume of deals in Europe: January 2009 - June 2014 An absence of obvious acquisition targets and considerable complexity in the processes is hindering the development of the European legacy market. Yannis Samothrakis, Paris 24 Direction of travel - % of inbound and outbound deals Europe has also seen significant inbound investment from the Middle East and Asia. Three of the top 20 largest deals in the last 12 months were from China, Japan and Qatar into European markets. In May 2014, China’s Fosun International Ltd. bought 80% of Portugal’s Caixa Geral de Depositos S.A.’s insurance unit for EUR1bn (USD 1.36 billion). The latter two were investments into the Lloyd’s market, which continues to provide insurers with immediate access to a global network of licenses, a pool of business and an excellent rating. 0 50 100 150 200 250 300 UK Russia France Spain Germany Ukraine Italy Cyprus Sweden Austria Ireland Belgium Switzerland Luxembourg Norway Deals in Europe by country: January 2009 - June 201425 Disposals drive activity There is no doubt that the disposal of selected assets has been a key catalyst for insurance transactions in the last several years. Last year, this was illustrated in Italy by Generali as it sold off the firm’s non-core and sub-scale assets as part of its turnaround programme. The programme continued this year with the sale of its subsidiary, FATA Assicurazioni Danni SpA, to Societa Cattolica di Assicurazione Sc – allowing the latter the opportunity to grow through diversification into the agriculture and food sectors. Also in Italy, regulators ordered Unipol to sell assets generating EUR 1.7 billion in gross premiums to comply with competition law after the insurer acquired its peer Fondiaria in 2012, making the combined Unipol /Fondiaria business the second-biggest insurer in Italy after Generali. These assets were acquired by Allianz from Unipol in June 2014. This year’s largest deal in Europe was the sale by ING Groep N.V. of shares in its insurer, NN Group N.V., the secondbiggest initial public offering in Europe this year. The sale of 28.6% of NN Group, with operations in Europe and Japan, brought ING closer to the end of a restructuring programme imposed by European Union regulators following a 2008 rescue from the Dutch government. ING will use the proceeds to pay debt and further unwind its business. It is not just the Eurozone crisis that continues to put assets on the block; normal operational issues can create sufficient problems to require the divestment of parts of a business. Two profit warnings in short succession meant that RSA was forced into a sales programme to bolster its balance sheet. Although this is only just getting under way as this report goes to press, the focus appears to be on withdrawing from its non-core assets with the announcement of the sale of RSA China to Swiss Re. The Co-op Group was also forced to dispose of its insurance business when it discovered a significant hole in the balance sheet of its bank. The business was acquired by Royal London Mutual Insurance. Regulation a slow burn A trend that has been more talked about than actioned is the sale of assets in response to the changing capital requirements of Solvency II – in particular around run-off. Despite this, many market respondents remain optimistic that there will be increased deal flow in this area – particularly in France and Germany – in the next few years. The combination of a date for the implementation of Solvency II, as well as changes to local market regulations and the expansion of activity from the mature legacy market in London into mainland Europe, is likely to stimulate future activity. However, one of the main barriers to completing legacy transactions is regulatory issues. Cultural resistance is also seen as a barrier; with anecdotal evidence suggesting that European insurers have historically felt that run-off was something they should manage internally. Beyond regional borders The trend to expand into new markets continued through the last 12 months, as insurers sought growth opportunities and greater returns than those offered in either their domestic or regional markets. Two of the largest deals between July 2013 and June 2014 illustrated this trend; the acquisition by Allianz of Yapi Kredi Sigorta A.S. in Turkey and AXA’s purchase of Tianping Auto Insurance in China. In the case of the former, Europe’s biggest insurer – Allianz – was clearly seeking to expand its emerging markets footprint. The deal will create Turkey’s largest insurer and will provide Allianz with access to Yapi & Kredi’s 928 banking branches for its products over the next 15 years. Turkey is forecast by the Organisation for Economic Cooperation and Development to grow 4.1% this year in contrast to the Euro area, which is expected to contract by 0.1%. “Turkey is one of the fastest growing insurance markets worldwide,” Allianz board member Oliver Baete said, and for him the transaction was “a unique opportunity to move into a market-leading position in one of Europe’s key growth markets.” Paris-based AXA has been expanding into emerging markets as developed markets remain sluggish in the wake of the global financial crisis. Last year it agreed to purchase HSBC’s general insurance businesses in Mexico, Hong Kong and Singapore. This year, it paid EUR 485 million (USD 631 million) to buy 50% of Chinese insurer Tian Ping, hoping that the country’s fast-growing number of car owners will help create growth in its auto insurance market. AXA has pledged to double its size in “high growth” markets, which last year accounted for 14% of its property and casualty (P&C) revenues worldwide. Regulatory uncertainty around run-off may cause UK businesses to look at options to locate themselves in other EU jurisdictions. Geraldine Quirk, London 26 A shrinking pool 2013 saw another spate of transactions around the Lloyd’s market, reinforcing its ongoing popularity as a platform for re/insurance businesses – although with each set of acquisitions the supply of acquirable Lloyd’s businesses reduces further. The latest stream of sales means that any further potential acquirers either need to consider a significant investment, acquire operations that might be considered sub-scale, or persuade private equity investors to exit at the sort of price that they are looking for. As the supply has decreased, valuations have risen sharply with deals typically being at around 1.5x book value. Last year’s largest deal was the acquisition of Canopius by Sompo, a subsidiary of NKSJ, one of Japan’s big three insurers – underlining the desire of insurers in saturated markets to expand beyond their home territory. “This acquisition, one of the largest we have undertaken, forms part of our long-term strategy to grow our overseas insurance business” commented NKSJ president Kengo Sakurada. Previous investments had been in its retail business in developing countries – for example, the acquisition of Fiba Sigorta (Turkey) in 2010, the acquisition of Berjaya Sompo Insurance Berhad (Malaysia) in 2011, and the acquisition of further shares in Maritima Seguros (Brazil) in 2013. The more recent acquisition of Antares by the Qatar Insurance Company is an illustration of emerging market insurers looking for a platform for expansion. Khalifa Al Subaey, Group President and CEO of QIC said: “The acquisition of Antares is another important milestone in QIC’s internationalisation strategy. Antares will help QIC to build a significant global property & casualty and specialty insurance footprint.” AmTrust Financial Services also completed the purchase of Sagicor Europe Limited (SEL) providing the US specialty insurer with a Lloyd’s managing agent. AmTrust Financial Services president and CEO Barry Zyskind said: “We are looking forward to the addition of SEL’s managing agency and Lloyd’s syndicates to our organisation. Access to Lloyd’s global resources greatly expands the capabilities of our insurance business. Lloyd’s brand, rating and efficient capital structure contributes significantly to our global insurance platform. “ Finally, the acquisition of Cathedral Capital by the Bermudabased Lancashire Holdings illustrates both the appeal of Lloyd’s licenses and an increasing need for size. Charles Mathias, chief risk officer for Lancashire commented both on the particular niches in which Cathedral operated that made it a good fit for Lancashire, as well as the increased scale of the enlarged company giving it more “clout” when negotiating deals with insurance brokers. He highlighted too the advantages of operating at Lloyd’s of London, which would improve the group’s ability to access new territories such as Brazil. Persuading PE The Cathedral deal meant that Alchemy Partners, its private-equity backer, enjoyed a return of over twice its initial investment. Several other Lloyd’s transactions also illustrated private-equity investors seeing returns on earlier acquisitions. The flotation of Brit Group in March 2013 saw the insurance business’s two main shareholders - funds associated with Apollo Global Management and CVC Capital Partners - realise part of their investment in the group, having taken it private in 2010. Late in 2013, private equity firm Aquiline syndicated 19.9% of Equity Redstar to Macquarie, which advised on the original acquisition. Jonny Allison, a managing director in Macquarie’s European operations described the deal as a “pretty clear turnaround story”. In November 2013, Enstar and Stone Point Capital completed the acquisition of Atrium Underwriting – giving the legacy specialist a live platform at Lloyd’s. Dominic Silvester, Enstar’s Chief Executive Officer, said: “The acquisition of Atrium’s ‘live’ underwriting platform will represent a further evolution of Enstar’s business.” Buy to kill? In the past 18 months some legacy acquisition companies have deliberately acquired or built underwriting businesses. Some of the drivers behind these hybrid businesses include smoothing the more irregular earnings from run-off by diversifying into live underwriting so as to provide an alternative investment flow for shareholders. There is, however, a possible downside. The often purist approach to claims settlement adopted by run-off re/insurers may create business tensions in the live space where relationships and reputation may require a more flexible approach being taken to claims settlement. The perennial popularity of the Lloyd’s platform was demonstrated again by the number of deals in the last 12 months. Andy Tromans, London 27 For example, in January 2013, Randall & Quilter (R&Q) launched its live Lloyd’s platform, Syndicate 1991, while Enstar acquired Atrium Underwriting Group, Arden Reinsurance and Torus Insurance Holdings to bridge the gap between writing legacy and live business. The underlying thinking being that this has the advantage of giving run-off firms access to new opportunities and books of business that they would not be able to write without the live underwriting capability. Legacy businesses have been looking at alternative income streams as legacy owners are reluctant to sell their books and the deal-flow in run-off has slowed. This means that those that do go to auction are bid for very competitively. For example in March 2014, Catalina - the legacy acquisition firm - announced that it had fought off competition from Enstar to purchase Sparta Insurance Holdings as well as completing the previously announced deal to purchase run-off reinsurer Alea Group from buy-out firm Fortress Investment Group. In a statement, Sparta said: “We have carefully explored our strategic alternatives and have concluded that the Catalina transaction combined with the renewal rights sale is in the best interests of our stakeholders.” As well as the dwindling of possible acquisitions, regulatory changes are also acting as a deterrent, particularly in the UK which has historically been seen as something of a run-off centre. Earlier in 2014, the Prudential Regulatory Authority said it would exercise new powers to oversee the proposed capital extraction from run-off businesses via schemes of arrangement, while also requiring more capital to be deployed for certain books. This more restrictive approach appears to be premised on the assumption that run-off business is inherently more risky than live business. However, in the last two decades, the majority of insurance failures have been in the live rather than the run-off market. This is in no small measure due to investment by the industry in the professional and proactive management of business in run-off, including development of exit routes that have achieved support from policyholders. Moreover, restricting the ability of investors to withdraw capital or make use of tools that facilitate closure could restrict the ability of shareholders in run-off entities to generate returns and this could deter investment in the industry both in terms of capital and human resources. It is likely that UK schemes will become less frequent, take longer to process and therefore be less attractive to short-term investors. The inability to exit via a scheme of arrangement may cause significant difficulties for smaller businesses that face both the capital burdens imposed by Solvency II and a limited range of exit options. This could result in run-off books being left to stagnate instead of being proactively managed or, at worst, becoming insolvent. All of which will have adverse consequences for policyholders and t he indust r y. The result could be that more run-off businesses look at options to locate themselves in other EU jurisdictions in order to maximise capital and regulatory efficiencies. For example, R&Q incorporated R&Q Insurance (Malta) Limited in February 2013 to act as the Group’s regulated European run-off insurance consolidator, both for its existing European Economic Area (EEA) based insurance companies and for future EEA based run-off transactions. Ken Randall, Chairman and CEO of R&Q, commented, “Above all, we are excited by the fact that the new Maltese company cements R&Q’s position as an efficient and flexible force in the provision of Europe wide run-off solutions.” Case study: Fosun – a multifaceted deal The purchase by Fosun – the Chinese investment company – of a controlling stake in Portugal’s state-owned Caixa Geral de Depositos S.A. was one of the most interesting deals worldwide of the last 12 months. The size of the transaction was significant, but it also illustrates two of the trends that have been driving M&A activit y. On one hand, this was a distressed sale – part of a series of privatisations being undertaken by the Portuguese government as one of the conditions to the financial aid it received from the European Union and the International Monetary Fund as part of its bailout following the global financial and subsequent Eurozone debt crises. On the other, this was an emerging market player displaying both its financial muscle and its international growth ambitions. “Fosun has long been striving to become an insuranceoriented investment group with comprehensive financial capabilities,” the Shanghai-based company said in a statement. “Portugal is a highly attractive key market and matches well with Fosun’s global expansion strategy.” Fosun Chairman Guo Guangchang described the deal as a “solid step for Fosun to develop Warren Buffet’s model.”28 Middle East & Africa The Middle East and Africa (MEA) span a range of markets at different stages of development both economically and in terms of the insurance industry. The story of M&A activity over the last 12 months reflects those differences.Overall, the number of transactions has risen to 17 in the period from June 2013 to July 2014 compared to seven in the prior year. However, while activity in the Gulf Cooperation Council (GCC) has been limited, emerging economies such as Turkey and Morocco have seen a number of deals, and a significant spike in transactions elsewhere in Africa suggests that the insurance industry could be waking up to the continent’s huge potential. As you were Economic prospects are bright and a number of factors point towards a healthy future for the insurance industry. These include a youthful population, significant government investment in infrastructure projects and an increasing emphasis on social welfare with mandatory health insurance being rolled out in the GCC. However, the Middle East remains a highly competitive market, with a large number of players, and appears ripe for consolidation. Regulators in markets including Saudi Arabia and the United Arab Emirates (UAE) have made overt moves explicitly designed to drive consolidation but up to now this has been met with limited success. In one example, in May 2014, Abu Dhabi’s financially struggling Green Crescent Insurance Company approved a capital increase worth around USD 27 million, which was underwritten by AXA, via a convertible bond offering. This deal is something of an exception as a number of barriers to transactions remain, including structural issues as well as often mismatched price expectations between buyers and sellers. In the case of the former, the business landscape across the region is characterised by the proliferation of family businesses, many of which are large conglomerates with operations spanning a range of diverse industries. Inevitably, a level of rivalry exists, with any one family business reluctant to enter into a transaction with another that may result in conferring a potential advantage. Pricing expectations are often similarly fraught. Start-up companies in Saudi Arabia and the UAE are required to list at the outset of their operations and usually perform well in first day trading. However, the initial share price is frequently over valued and the subsequent drop in market value creates a stumbling block in terms of agreeing a price ahead of a sale. Pricing expectations in other markets in the region are also unrealistic and it can be very difficult to get meaningful due diligence information from local entities. And while there is definite appetite amongst the international insurance community to enter or strengthen their presence in the market, restrictions on foreign ownership still act as a dampener on those ambitions. 0 5 10 15 20 25 30 35 H1 2009 H2 2009 H1 2010 H2 2010 H1 2011 H2 2011 H1 2012 H2 2012 H1 2013 H2 2013 H1 2014 29 Volume of deals in the MEA: January 2009 - June 2014 We are seeing a surge of interest from overseas in starting up reinsurance operations in the DIFC. Wayne Jones, Dubai30 An alternative route – the rise of the GCC reinsurance market One increasingly common tactic to navigate around some of these challenges is participation in the reinsurance market. International players have been looking at coming into the Dubai International Financial Centre (DIFC), the federal financial free zone situated in the UAE, where 100% foreign ownership of reinsurance entities is permitted. In one example, in May 2014 Catlin Middle East was granted a Category 4 licence by the Dubai Financial Services Authority (DFSA) to operate as a Lloyd’s coverholder. As an authorised entity in the DIFC, Catlin Middle East can provide insurance intermediation and insurance management. It will underwrite on behalf of Catlin Syndicate 2003, offering facultative reinsurance to insurers in the GCC countries, Africa and parts of South Asia. Describing the drivers behind the move, Mark Newman, Chief Executive Officer of Catlin Asia-Pacific, said: “The establishment of Catlin Middle East parallels Catlin’s diversification strategy to build a distinctive and efficient international structure. Our expanded geographical footprint enables us to better take advantage of opportunities, increase awareness of the Catlin brand and work more closely with brokers and their clients.” Other international players may follow suit, setting up similar operations in the DIFC to serve as a staging post in the region from which they can explore other options or entering into fronting arrangements with the local market. Beazley has announced plans to open an office in Dubai and, with Lloyd’s reported to be set to establish a full trading platform by the end of 2014 as part of its global expansion strategy, in-bound interest is only likely to increase. For example, in July 2014, Markel applied to the DFSA to establish a company to operate within the Lloyd’s office at the DIFC, initially focusing on offering trade credit cover before potentially expanding into other lines. Other transaction drivers In terms of acquisition rather than start-up, we may see some targets being offered for sale as international players dispose of assets as they embark on strategic realignment. As part of a new strategic focus, Stephen Hester, Group Chief Executive of RSA has said the company will “build shareholder value from a strong capital platform across its main core businesses” in the UK & Ireland, Scandinavia, Canada and Latin America, thereby indicating it will potentially put its operations in other territories up for sale. Elsewhere, we may start to see more out-bound deals following the acquisition by the Qatar Insurance Co of Bermuda-based Antares. Khalifa Al Subaey, Group President and CEO of QIC said:“We are now generating over 50% of our premium volume in international markets. QIC will continue to build out this additional engine of growth in order to complement and diversify our highly dynamic domestic and regional business.” Qatar is a limited market but its insurers are cash-rich and looking to expand. Qatar Re has opened operations in Zurich, Malaysia and London – albeit through the start-up route rather than via acquisition. It will be interesting to observe the insurer’s next steps as where it goes others may follow. Indeed, elsewhere in the region, anecdotal evidence indicates that both Oman Insurance Company and Orient Insurance Company are looking at regional expansion. The appeal of new markets One route they and others will be looking at is expansion into North Africa and Turkey although the specific route - via new start start-up or acquisition – will depend on each individual opportunity. Turkey’s economy is booming and offers significant opportunities for growth. Orient started operations in the country about 12 months ago and other players are looking closely at it too. They include Germany’s Allianz, which made a combined investment of over USD 1.4 billion in two separate transactions in 2013 involving Yapi Kredi Sigorta, one of Turkey’s largest insurers. As part of the agreement Allianz secured access to Yapi & Kredi’s 928 banking branches for its products over the next 15 years. The takaful market has yet to build sufficient scale in a competitive market, which could create potential for M&A. Peter Hodgins, Dubai31 Elsewhere in the region, Morocco saw six deals in the period July 2013 to June 2014. These included the acquisition of a 13% stake in Saham Group by French investment company Wendel for a fee of around USD 136 million. Of the remaining five deals, just one was domestic with the other four involving targets elsewhere in Africa. Moroccan insurers are not the only ones waking up to the potential of Africa as a growth insurance market. In 2013, Prudential – the UK’s largest insurer by market capitalisation – began selling insurance in Africa for the first time after the acquisition of Ghana’s Express Life Insurance Co Ltd. Ahead of the deal, Tidjane Thiam, the Pru’s chief executive, who was born in Ivory Coast, had been talking up the economic prospects of the continent and its expanding middle class. In a speech in 2013, he said: “Today, Asia is good news for all of us. Tomorrow, Africa will be good news for all of us. I am happy to go on the record and say that the 22nd century will be the African century.” Another insurer that would seem to share that sentiment is London-listed Old Mutual which in April 2014 bought a 67% controlling stake in Faulu Kenya for around USD 409 million. Kenya also saw two domestic deals in the period and we may see more transactions of this type if local players look to consolidate either to protect themselves against – or make themselves more attractive to – interest from potential foreign acquirors. Takaful – a long-term play The takaful sector is seeing double digit premium growth per annum – albeit from a low base – so interest in this segment remains keen. Conventional insurance players are increasingly looking at how they might enter the market and, although there is a perception that the sector remains under-capitalised, a perennial area of focus is on how it can be expanded. Indeed, the takaful market is characterised by a high proportion of smaller players who have yet to build sufficient scale to get themselves on the map. Many of these re/insurers are struggling to compete, therefore presenting potential targets for acquisition. Evidence of this can be seen in the last 12 months with Kuwait International Bank KSC acquiring its compatriot Ritaj Takaful Insurance Co and – in another domestic deal – Syrian International Islamic Bank buying Al Aqeelah Takaful Insurance. In another interesting development last year, Londonbased firm Cobalt launched a sharia-compliant insurance platform that uses a syndication model to help spread risk across a panel of underwriters, a novel format that could boost capacity in the sector. With backers including AIG and XL providing capacity and know-how, this is a move that should certainly benefit the development of the takaful sector in the medium to long-term and potentially help lay the foundations for further M&A. Case study: Allianz bolts on MINT-y freshness Much has been made of the new grouping of fast growth economies, the MINT countries, which comprises Mexico, Indonesia, Nigeria and Turkey. In a prime example of a deal driven by the search for opportunities in emerging markets – and evidence that international players are taking notice of the MINTs – Germany’s Allianz made a bold and significant investment in Yapi Kredi Sigorta A.S., one of Turkey’s largest insurers. The transaction also illustrated the trend towards bolton acquisitions that complement a buyer’s core business. Describing the rationale behind the deal, Oliver Bäte, an Allianz board member, encapsulated what many in the market must be thinking with regard to the country. “Turkey is one of the fastest growing insurance markets worldwide, supported by a robust economic outlook and a large, young population of 75 million people,” he said. “The transaction with Yapı Kredi is a unique opportunity to move into a marketleading position in one of Europe’s key growth markets, which is also an important bridge between Europe and Middle East/Central Asia. This transaction fits perfectly into Allianz’s strategy to use bolton acquisitions to strengthen its position in growth markets.” We expect further M&A in Turkey as other international players look to emulate Allianz’s move.