Insurance M&A activity a global overview 2014

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.