Global insurance M&A trends

  • 1,004 views
Uploaded on

This document draws together our views, observations and analysis of the global trends in the insurance M&A market, including influencing factors and macroeconomic variables. …

This document draws together our views, observations and analysis of the global trends in the insurance M&A market, including influencing factors and macroeconomic variables.
Our analysis covers five primary regions: Western Europe, North America, Asia, Latin America and the Middle East and North Africa. Each section includes a review and remark on deal activity and current trends, in addition to consideration
of future bearings.

  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Be the first to comment
No Downloads

Views

Total Views
1,004
On Slideshare
0
From Embeds
0
Number of Embeds
2

Actions

Shares
Downloads
6
Comments
0
Likes
1

Embeds 0

No embeds

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
    No notes for slide

Transcript

  • 1. Global Insurance Mergers and Acquisitions
  • 2. 2 Global Insurance – Mergers and Acquisitions Contents 03 Introduction 04 Global Insurance M&A 06 Global Deal Pricing and Value 08 Top 50 Global Deals (2011-2013) 10 Western Europe 14 North America 18 Asia Pacific 22 Latin America 26 Middle East and North Africa 30 Private Equity 32 Transaction Risk
  • 3. Global Insurance – Mergers and Acquisitions 3 This document draws together our views, observations and analysis of the global trends in the insurance M&A market, including influencing factors and macroeconomic variables. Our analysis covers five primary regions: Western Europe, North America, Asia, Latin America and the Middle East and North Africa. Each section includes a review and remark on deal activity and current trends, in addition to consideration of future bearings. We believe that improving macroeconomic conditions in developed markets will bring more positive activity in the near future. We would welcome the opportunity to discuss our insights into your specific sector with you. Dear board member Introduction Peter Allen Partner Global Head of Insurance T +44 (0)20 7728 2154 E peter.d.allen@uk.gt.com
  • 4. 2006 2007 2008 2009 2010 2011 2012 2013 615 755 1450 1060 892 518 537 342 4 Global Insurance – Mergers and Acquisitions Global Insurance M&A Since the global financial crisis, we have observed a consistent decline in global deal activity; with deal volume hitting its lowest level through 2011. However, there is ample evidence for optimism in the near future. Although a cautionary attitude towards M&A remains, the effects of more stringent monitoring of capital and operational ‘belt-tightening’ have left a number of firms with capital to deploy. Improved macroeconomic conditions in developed countries, allied to the availability of attractive financing options is having a positive effect on firms’ appetite to re-enter the M&A market. While most observers have suggested that the market has been driven by a desire to expand, both from a product and a geographic perspective, Grant Thornton’s research suggests that, following the global financial crisis, disposals remain a prominent driver. Additionally, domestic consolidation has emerged as a key theme, particularly in developed markets, but also in emerging economies. Between 2011 and 2013, over half of the companies targeted were insurance distributors. Distributors present an attractive investment proposition for both cash buyers and private equity houses. The former due to their strategic importance; the latter because brokers are often cash- generative. Moreover, the lack of exposure to underwriting risk reduces the capital volatility. These tactical acquisitions are also highly beneficial for intermediaries as they allow them to meet their expansion plans. The acquisition of distributors is remarkably important in Western Europe and the United States. Despite high valuations in the wholesale broking sector, continued industry consolidation is expected in 2014 due to high intermediation in mature economies. Number of Global Insurance Deals (2006 – 2013) Source: Insurance Intelligence Center
  • 5. 19% 11% 3% 61% 6% 55% 7% 11% 23% 2% 2% Global Insurance – Mergers and Acquisitions 5 Global Insurance M&A Unsurprisingly, the United States remains the most active region globally. This is despite myriad challenges, including slow insurance market growth, poor insurance pricing and insurance catastrophes such as Superstorm Sandy. Meanwhile, there has recently been a notable rise in deal activity in emerging markets, particularly in Latin America and Asia Pacific. Insurers are increasingly drawn to high growth markets in search of returns. Conversely, insurers in emerging countries have shown a greater interest in acquiring companies established in mature economies. Volume of Global Insurance Deals: Regional Market Share (2011 – 2013) Europe Asia Middle East & North Africa North America Latin America Source: Insurance Intelligence Center Accident and Healthcare Insurance Distribution Life Insurance Non-Life Insurance Reinsurance Services Source: Insurance Intelligence Center Volume of Global Insurance Deals: Target Company by Subsector (2011 – 2013)
  • 6. 0 5,000 10,000 15,000 20,000 US$ Million Deal Y-3 Deal Y-2 Deal Y-1 Deal Year Deal Y+1 Deal Y+2 Deal Y+3 0 5 10 15 20 25 30 35 Price Earning Ratio Deal Y-3 Deal Y-2 Deal Y-1 Deal Year Deal Y+1 Deal Y+2 Deal Y+3 6 Global Insurance – Mergers and Acquisitions Global Deal Pricing and Value The analysis of post-deal Total Net Asset Value (TNAV) and Price-Earnings Ratios (P/E Ratios) of the top 50 global deals presents interesting contrasts. P/E trends suggest that short-term sentiment reacts positively to deals. TNAV evaluations offer a direct contradiction. Companies suffer a decrease in net asset value the year following the deal. This is likely a direct consequence of deal costs such as re-alignment, operational changes or cultural integration. Nevertheless, this is followed by a steady recovery which derives from the strategic benefits of the acquisition. Top 50 Global Deals: Average TNAV (2011 – 2013) Top 50 Global Deals: Impact on Average P/E Ratio (2011 – 2013) Source: Grant Thornton Research and Insurance Intelligence Center Source: Grant Thornton Research and Insurance Intelligence Center
  • 7. 0 100 200 300 400 500 600 US$Million AverageP/BV 2008 2009 2010 2011 2012 0.5 0 1 2 1.5 2.5 3 Global Insurance – Mergers and Acquisitions 7 Global Deal Pricing and Value Price to book values recovered sharply in 2011 and eased off in 2012. One possible reason for the 2012 movement is that average deal sizes were much higher, implying that larger deals are - unsurprisingly - priced more cautiously. Source: Grant Thornton Analysis of Deloitte Insurance M&A 2013 Insurance Deals: Price to Book Value (2008 – 2012) No. of Deals Average Deal Values (US$M) Average P/BV Deal Multiples
  • 8. 0 10,000 20,000 30,000 40,000 50,000 Western Europe North America Southeast Asia Latin America Middle East and Africa US$Million 26% 32% 26% 12% 4% 8 Global Insurance – Mergers and Acquisitions Top 50 Global Deals (2011-2013) Although North America was the location for more than 60% of global M&A deals between 2011 and 2013, when considering the Top 50 Deals by Value, only 32% of the sample took place there. Surprisingly, despite significant lower insurance premium volume, Asia Pacific was the location for 26% of the top 50 global deals in 2012. In 2010 and 2011, the search for growth had been the overwhelming driver behind global deal making. Insurers sought to diversify their risk by expanding their product ranges and geographical footprint. Moreover, firms focused on maximising available capital, often taking advantage of perceived low prices and opportunities to acquire ailing businesses. However, Grant Thornton’s analysis of the 50 largest deals between 2011 and 2013 indicates a change in trend. Divestments, either by insurers or banks, are prevalent, with over 50% of deals driven by a desire to dispose of businesses that are not strategic priorities or are no longer financially profitable, or forced upon financial institutions by governments and regulators. Top 50 Global Deals: Breakdown by Region and Value (2011 – 2013) Source: Grant Thornton Analysis 2013 2012 2011 Top 50 Global Deals by Region (2011 – 2013) Western Europe North America Southeast Asia Latin America Middle East and Africa Source: Grant Thornton Analysis
  • 9. 0 500,000 1,000,000 1,500,000 2,000,000 2008 2009 2010 2011 2012 US$Million 35% 22% 8% 31% 4% Global Insurance – Mergers and Acquisitions 9 Top 50 Global Deals (2011-2013) Prior to the global financial crisis, consolidation drove deal-making activity, partly due to the ease with which institutions could leverage debt, in addition to the availability of funding from Private Equity investors. Moreover, as banks sought to broaden their portfolios, particularly given the increasing appeal of bancassurance products, M&A activity led to further consolidation. However, with the financial pressures resulting from the crisis came a change in the status quo. Banks were required to rebuild their balance sheets, sometimes by disposing of their non-core businesses. Each trend that typified pre-crisis conditions was systematically reversed by the new norms. Macroeconomic conditions are showing favourable trends; as 2014 progresses, market conditions are likely to be more akin to those of pre-crisis times, at least in developed markets. The cyclical nature of such trends would suggest that, with improved conditions, deal-making will increase and consolidating trends will return. Insurance Premium Volume by Region (2008-2012) (2008 – 2012) Source: Sigma Western Europe North America Latin America Advanced Asian Markets Emerging Asia Top 50 Global Deals Rationale (2011 – 2013) Divestment by an Insurance Business Divestment by a Bank Private Equity Bolt-on Unrated Source: Grant Thornton Analysis of Insurance Intelligence Center
  • 10. 10 Global Insurance – Mergers and Acquisitions Western Europe
  • 11. 0 50 100 150 200 250 300 2009 2010 2011 2012 2013 US$Billion 0 2 4 6 8 10 12 United Kingdom France Italy Germany Spain Austria Switzerland Total Life Non-life Global Insurance – Mergers and Acquisitions 11 Western Europe Western Europe Despite recent signs of recovery and improved levels of confidence, uncertainty remains in Western Europe, particularly in the south. In the current low growth environment, many companies have opted for organic growth over acquisitions, explaining the relatively low volume of deals in the last four years. Nevertheless, with 19% of global deals, as a whole, Europe remains an important location for M&A activity. Although Europe is often perceived as a single market, the political and macroeconomic panorama varies dramatically from one country to another. The vast difference in deal volume between states is therefore unsurprising. A recent survey by Clifford Chance found that the UK is the most attractive European country for M&A1 . Despite the stringent entry requirements imposed by the Franchise Board, Lloyd’s of London remains one of the most appealing investment propositions. For insurers outside Europe, Lloyd’s guarantees immediate access to a global network of licences, a pool of business and a rating2 . In such a mature market, internal growth opportunities are limited, especially in this uncertain economic climate; consequently, we expect more consolidation in order to achieve economies of scale or capital efficiency, particularly now that the Solvency II timeline is clearer. 1 Clifford Chance. “European M&A: On the road to recovery?” 2 Clyde&Co: “M&A activity, A Global Overview 2009-2013” Austria Germany France Italy Spain Switzerland United Kingdom Western Europe: Gross Written Premiums (2009 – 2013) Western Europe: Penetration as a % of GDP (2012) Source: Insurance Intelligence Center Source: Insurance Intelligence Center
  • 12. 47% 10% 27% 4% 6% 6% 0 20 40 60 80 100 120 2010 2011 2012 2013 0 75 150 225 300 375 450 DealValue(US$Million) Number of Deals Average Value of Disclosed Deals 12 Global Insurance – Mergers and Acquisitions Western Europe Many European insurers are looking to invest in emerging markets as they offer greater returns. This is particularly true for Property and Casualty, composites and reinsurance firms. However, there is competition for quality targets. Further transactions are motivated by a desire to diversify the product offering and diversify the scope of the distribution model; not only to achieve greater returns, but also due to the pressure from rating agencies that may apply pressure to firms that do not offer a wide range of products in various regions3 . The Lloyd’s Market will continue to entice deal-makers, its global standing and exposure to a highly diverse portfolio of risk regardless of market conditions appeals to international insurers looking to expand their global footprint. The similarity in risk profile between the Lloyd’s Market and reinsurers or Property and Casualty specialists, remains attractive. Meanwhile, as a mature market showing signs of renewed macroeconomic growth, Grant Thornton does not expect to see major structural changes in M&A activity in the near future. Deal-making is likely to be on an opportunistic basis, partly driven by disposals. Western Europe: Target Company by Subsector (2011 – 2013) Accident and Healthcare Insurance Distribution Life Insurance Non-Life Insurance Reinsurance Services Europe: Number of Deals and Average Deal Value (2010 – 2013) Source: Grant Thornton Research and Insurance Intelligence CenterSource: Grant Thornton Research and Insurance Intelligence Center The United Kingdom is widely perceived as the most attractive M&A market in Europe. Germany and Scandinavian countries complete the list of the most attractive countries. All are stable environments in which to operate and have remained relatively resilient to much of the financial turmoil witnessed in Southern Europe since 2008. 3 Ibid 2
  • 13. 11 10 9 0 10 20 30 40 50 60 70 80 United Kingdom France Italy Germany Spain Austria Switzerland 2010 2011 2012 2013 6 France – Russia 8 Netherlands 9 Poland 10 Italy – Luxembourg – Switzerland – Ukraine Global Insurance – Mergers and Acquisitions 13 Western Europe Europe: Volume of Insurance M&A Deals (2010 – 2013) Source: Grant Thornton Research and Insurance Intelligence Center 1 Source: Towers Watson Source: Insurance Intelligence Center Lloyd’s M&A Transactions (2010 – 2013) 2011 2012 2013 UK life insurers are being affected by the Retail Distribution Review which encourages customers to shop around for better deals and increases competition. Life insurer Partnership Assurance, owned by private equity firm Cinven and valued at £1.8 billion, was floated in June 2013. The flotation presented the firm’s owners with a return of more than seven times their investment. Morgan Stanley and Bank of America managed the IPO. Nevertheless, the company recently suffered a 21% fall in its share price after missing their sales targets and announcing that they don’t expect sales growth. In its IPO prospectus, Partnership predicted that distribution channels could be “adversely affected” if regulators were to “consider that any of the agreements the group has in place with distributors are at risk of non-compliance with their interpretation of the rules, or the spirit of, the RDR”. Similarly, Just Retirement was floated at the beginning of November 2013 but its shares fell 5% on the first day, this is the second experience of the company in public markets. It was bought by a private company in 2009 when its shares were badly affected during the financial crisis. As public markets re-open through 2014, large deals are likely to be conducted via flotation, particularly as Private Equity firms look for strategic exits. Case Study: Flotation The Most Attractive European Countries for M&A1 1 United Kingdom 2 Germany 3 Sweden 4 Norway 5 Denmark
  • 14. North America 14 Global Insurance – Mergers and Acquisitions
  • 15. 0 200 400 600 800 1000 1200 2009 2010 2011 2012 2013 US$Billion 0% 20% 40% 60% 80% 100% United States Canada Global Insurance – Mergers and Acquisitions 15 North America North America Despite the adverse effects of the financial crisis and burgeoning growth in emerging markets, North America continues to dominate the insurance M&A market, contributing over 50% of deals globally, between 2011 and 2013. This is both a predictable and natural consequence of the size and maturity of the world’s premier insurance market. Nevertheless, despite the economic signs of recovery, growth is still slow and has been further affected by budgetary disagreements. Compared with previous years where there were suggestions of a recovery, 2013 saw a significant reduction in deal volume in the US. Moreover, average deal value has also decreased every year since 2010 and the number of reported deals in 2013, to date, is only 25% of that in 2010. Regulation continues to play a key role in both Canada and the USA’s insurance market. Canada’s historically burdensome regulatory environment, coupled with domestic domination of the market, has made the environment less attractive to foreign companies, which explains the country’s low volume of insurance deals. Increasing solvency and corporate governance requirements are likely to cause mid-sized and smaller underwriting businesses difficulty. Large insurers possess the resources and capabilities to handle these changes. This could potentially drive consolidation in some of the region’s more fragmented insurance sectors. The Patient Protection and Affordable Care Act, is also propelling consolidation in the healthcare sector. North America: Gross Written Premiums (2009 – 2013) United States Canada North America: Distribution Channels (2011 – 2013) Agencies Bancassurance Insurance Brokers E-Commerce Direct Marketing Source: Insurance Intelligence Center Source: Insurance Intelligence Center
  • 16. 0 50 100 150 200 250 300 350 2010 2011 2012 2013 0 50 100 150 200 250 300 350 2010 2011 2012 2013 DealValue(US$Million) 0 250 500 750 1000 1250 1500 1750 16 Global Insurance – Mergers and Acquisitions North America An improving macroeconomic environment will drive activity through 2014. Grant Thornton believes that, with the emergence of capital-related regulatory requirements, deal activity will pick up and, likely, be marked by consolidation. Firms will increasingly focus more on management and allocation of capital. More integrated, enterprise-wide approaches to risk management will be unavoidable, particularly for larger insurers. North America: Volume of Insurance Deals (2010 – 2013) USA Canada North America: Number of Deals and Average Deal Value (2010 – 2013) Number of Deals Average Value of Disclosed Deals Source: Grant Thornton Research and Insurance Intelligence Center Source: Grant Thornton Research and Insurance Intelligence Center
  • 17. 1% 2% 65% 6% 20% 6% Accident and Healthcare Insurance Distribution Life Insurance Non-Life Insurance Reinsurance Services Global Insurance – Mergers and Acquisitions 17 In February 2013, Markel Corporation, an underwriter of speciality insurance products, entered into a merger agreement to acquire Alterra Capital Holdings Limited, a Bermudian provider of diversified insurance and reinsurance products for $3.1 billion. In a joint statement the companies declared: “The combination of Markel and Alterra is expected to create significant benefits for the shareholders of both companies, and to provide a robust foundation for strong financial performance going forward”. This merger brought together different underwriting teams with limited overlap in diverse specialty insurance and reinsurance lines. These complementary business profiles provided important diversification of risk. Despite seeing some senior departures when the merger was announced, the deal has already attracted increased submissions. Dave Kalainoff, Markel Chief Underwriting Officer, stated: “We are seeing more quota share opportunities with submissions coming in from companies interested in buying. Pricing on the original business is now getting close to the point where we can support a quota share”. In August 2013, AM Best affirmed the financial strength rating of A upon Alterra Bermuda Limited and its affiliated operating companies. This rating took into consideration the consolidation and the future benefits to result from its integration into Markel. The rating also confirmed the immediate benefits gained in terms of scale, reach, brand, distribution platform and its leadership position in the excess and surplus lines market place in the United States. Case Study: Market Consolidation North America: Target Company by Subsector (2011 – 2013) North America Source: Grant Thornton Research and Insurance Intelligence Center
  • 18. 18 Global Insurance – Mergers and Acquisitions Asia Pacific
  • 19. 2009 2010 2011 2012 2013 US$Billion 0 100 200 300 400 500 0 4 8 12 16 20 India Singapore South Korea Hong Kong Japan Taiwan China Vietnam M alaysia Indonesia Philippines Thailand 2010 2011 2012 2013 Global Insurance – Mergers and Acquisitions 19 Asia Pacific Asia Pacific With an 11% share of the global market, Asia Pacific closes the gap on the European market. Deal volumes were flat through 2012 and early 2013, following a raft of activity in 2011 as the region emerged as the primary destination for investors looking for increased Return on Equity. The deal-making frenzy of 2011 has had a notable impact on valuations in the region. Buyers are often faced with inflated valuations or, some may argue, valuations that better reflect the growth potential of the region. Asian insurers trade at a median Price to Book (P/B) ratio of 1.731 , while deals in Europe and the United States are struck at rates closer to half of that. This suggests that these valuations are prompting hesitation on the part of investors. Despite considerable investor interest in recent times, the Asian market remains proportionately under-penetrated. This makes for an attractive proposition for investors and acquirers. China Indonesia Japan Hong Kong Malaysia Philippines South Korea Asia Pacific: Gross Written Premiums (2009 – 2013) Source: Insurance Intelligence Center 1 Thompson Reuters Asia Pacific: Volume of Insurance Deals (2010 – 2013) Source: Insurance Intelligence Center
  • 20. DealValue(US$Million) 0 10 20 30 40 50 60 2013201220112010 0 100 200 300 400 500 600 12% 18% 35% 32% 3% Accident and Healthcare Insurance Distribution Life Insurance Non-Life Insurance Reinsurance 0 5 10 15 20 Hong Kong Japan Singapore South Korea Philippines Taiwan China Vietnam M alaysia Indonesia Thailand Total Life Non-life 20 Global Insurance – Mergers and Acquisitions Asia Pacific Correlated to strong economic growth, the demand for insurance is growing. Indonesia and Malaysia present a strong case for investment in the region, with penetration rates below 5% of GDP, coupled with growing populations and increasing personal wealth. The Indonesian market continues to grow, premiums having increased 10% year-on-year2 , so the opportunity to make investments is considerable. Deal rationale in the region is dominated by the ambition to expand existing business. Close to 15% of all deals are motivated by a desire to expand geographically. A significant number of deals originate from better capitalised foreign investors looking to enter the Asian marketplace. Yet, over 60% of all deals originate from within the region. Opportunities may result from reduction in foreign ownership restrictions, particularly in countries such as India. Despite relatively subdued M&A levels in India in recent times, the government has indicated publicly (both at home and abroad) its intention to increase the current 26% FDI limit to 49%. Yet, there has been political opposition and it is thought that legislation may be further delayed. Nonetheless, India’s large population, growing middle class, significant under-penetration of products and a need for additional capital cannot be filled by local investors alone. Asia Pacific: Number of Deals and Average Deal Value (2010 – 2013) Number of Deals Average Value of Disclosed Deals Asia Pacific: Target Company by Subsector (2011 – 2013) Source: Insurance Intelligence Center Source: Insurance Intelligence Center 2 Grant Thornton Analysis of Insurance Intelligence Center Asia Pacific: Insurance Penetration as a % of GDP (2012) Source: Insurance Intelligence Center
  • 21. Global Insurance – Mergers and Acquisitions 21 In February 2012, HSBC sold its entire shareholdings (15.57%) in Ping An Insurance (Group) Company of China to Charoen Pokphand Group Company Limited for US$9.39 billion. It is estimated that the bank made US$2.6 billion out of the disposal. As HSBC’s Chief Executive confirmed, this transaction represents further progress in the execution of the group’s strategy. In 2012, the UK bank sold its general insurance businesses in Hong Kong, Singapore, Argentina and Mexico. Thanks to this sale, HSBC expects to boost its Core Tier 1 capital ratio by half a percentage point and its total capital ratio by a full percentage point improving its Basel III position. This acquisition by Charoen Pokphand Group, owned by Dhanin Chearavanont, represents the biggest Chinese acquisition by a Thai entity. An analyst noted that “it makes sense for the group to get its hands in the country’s financial sector as a way to capture some of China’s fast growth”. Disposals continue to drive the Global Insurance M&A market. Grant Thornton’s analysis of the 50 largest deals between 2011 and 2013 found that 33% of deals were bank disposals. The trend is a direct consequence of the regulatory constraints on banking institutions. Subsequently, many of these disposals court the attention of local insurers looking to diversify their product offerings or expand their geographical presence. Case Study: Bank disposal Easy to enter? The dynamic and unique political and regulatory nuances of the Asian region present myriad challenges to investors. Balancing the attractiveness of the market and potential returns against the challenges they will face is a key success factor for inter-regional deals. Asia Pacific Asia Pacific: Market Attractiveness vs. Ease of Entry 0 Non-Life GWP (2011) 10 20 30 40 50 MarketAttractiveness Ease of Market Entry 180 170 160 150 140 130 120 110 100 90 80 Indonesia Hong Kong Singapore Taiwan Malaysia Thailand Vietnam India Source: Grant Thornton Analysis
  • 22. Latin America 22 Global Insurance – Mergers and Acquisitions
  • 23. 0 1 2 3 4 PeruEcuadorUruguayMexicoColombiaPanamaArgentinaBrazilVenezuelaChile Total Life Non-life 2009 2010 2011 2012 2013 US$Billion 0 20 40 60 80 Global Insurance – Mergers and Acquisitions 23 Considering the major economic crisis and the periods of political instability that South America went through during the 90’s, the economic recovery of the last decade is more than remarkable. This region is now prosperous, generally stable and therefore an attractive destination for investors affected by the slow growth and financial volatility of the developed world. Brazil is the biggest insurance market in the region, the volume of written premiums having doubled in the last five years. Vast infrastructure investments, the recent discovery of oil reserves and the hosting of two sporting mega-events will increase the premium growth potential. Chile shows the highest insurance penetration rates which are mainly due to the premiums linked to its social security programs. Although Chile’s population is a lot smaller than that of Argentina and Colombia, their Gross Written Premiums are comparable. Despite progress made in recent years, penetration rates in the region remain low and mainly driven by non-life insurance, offering unprecedented prospects for premium growth. Latin America Latin America Argentina Brazil Colombia Peru Chile Mexico Latin America: Gross Written Premiums (2009 – 2013) Latin America: Penetration as a % of GDP (2012) Source: Insurance Intelligence Center Source: Insurance Intelligence Center
  • 24. DealValue(US$Million) 0 5 10 15 20 25 30 35 2013201220112010 0 100 200 300 400 500 600 10% 42% 17% 26% 5% Accident and Healthcare Insurance Distribution Life Insurance Non-Life Insurance Reinsurance 24 Global Insurance – Mergers and Acquisitions There has been sustained deal flow in Latin America since 2011, with Brazil, Mexico and Argentina particularly prominent. Although the region is attractive to foreign investors, most of the deals have been internal. Despite the lack of barriers to entry, potential investors must consider the high-market concentration in some of the most attractive countries, such as Brazil or Mexico, where the top five insurers dominate the non-life sector. Distribution networks and brokers remain principal targets for acquirers, contributing over 40% of total transactions in recent times. The absence of capital volatility associated with underwriting businesses, combined with the regional importance of distribution networks and their subsequent value, ensure these businesses are attractive to a wide range of potential acquirers. One of the main reasons we have not seen more activity in the region is because the largest international companies such as Zurich, Allianz and MetLife are already present in the market. Undoubtedly, the mild depression of the economy has also had a negative effect on the number of transactions. Nevertheless, the increasing demand for more sophisticated insurance products will continue to attract experienced foreign investors; therefore, we expect strong insurance M&A activity though 2014 and beyond. Latin America Latin America: Number of Deals and Average Deal Value (2010 – 2013) Number of Deals Average Value of Disclosed Deals Latin America: Target Company by Subsector (2011 – 2013) Source: Grant Thornton Research and Insurance Intelligence Center Source: Grant Thornton Research and Insurance Intelligence Center
  • 25. 0 4 8 12 16 20 PeruMexicoEcuadorColombiaChileBoliviaBrazilArgentina 2010 2011 2012 2013 Global Insurance – Mergers and Acquisitions 25 Latin America As part of its plan to grow overseas, UnitedHealth Group Inc. bought 90% of Brazil’s Participações for $4.3 billion. With this acquisition, the American company intends to enter the rapidly growing health market in Brazil, where the expanding middle class is stimulating demand for health-related insurance products. The company’s Chief Executive, Stephen J. Hemsley, compared Brazil’s potential to the U.S. market several decades ago and stated: “We believe we have never seen a more compelling opportunity for growth, value and service”1 . Although some analysts consider that the price paid for the acquisition is somewhat onerous, it is justified by the country’s growth potential as only one quarter of the population has private health insurance. Moreover, despite the Brazilian government offering health care services, due to budget constraints, the system is strained. Therefore the demand for such products is expected to grow exponentially. In the US market, due to burdensome regulation, numerous companies are looking for faster growing companies overseas. On the other hand, foreign companies benefit from the US expertise in the health sector. Despite the obvious benefits of the deal, United Health will face myriad post-deal regulatory challenges, particularly as Brazilian law does not fully permit foreign ownership of hospitals. Case Study: UnitedHealth Group acquires 90% of Participações 1 The Wall Street Journal: ‘UnitedHealth to Buy 90% of Brazil’s Amil for $4.3 billion’ 2 Grant Thornton Analysis of Economist Intelligence Unit, 2013 Latin America: Volume of Insurance Deals (2010 – 2013) Source: Insurance Intelligence Center
  • 26. Middle East and North Africa 26 Global Insurance – Mergers and Acquisitions
  • 27. 0 1 2 3 4 5 IsraelTurkeyKuwaitJordanOmanMoroccoSyriaUnited Arab Emirates Bahrain Total Life Non-life US$Billion 0 2 4 6 8 10 12 2013201220112010200920082007 Global Insurance – Mergers and Acquisitions 27 Middle East and North Africa Middle East and North Africa The IMF states that the “near-term economic outlook for the MENA region has weakened”1 . Deal volumes and values remained relatively robust in the immediate aftermath of the global financial crisis. However, in light of numerous regional conflicts and political transitions, the region faces a period of uncertainty. Gross Written Premiums have continued to grow, year-on-year, with the non-life market representing close to two thirds of the total premiums written in the region. Though, real premium growth dropped by close to 50% in 2012. Despite short-term turbulence, social and demographic trends in the region are favourable – an increasingly affluent and young population, low insurance penetration rates (regionally, 1.1%) and wealthy governments prepared to invest in infrastructure and social welfare. Indeed, projected CAGR growth between 2012-2017 is estimated at 18.1% per annum2 . Cultural hurdles and state-owned businesses remain the primary barriers to more significant M&A activity in the region. Added to this, regulatory restrictions complicate matters; in the United Arab Emirates and Saudi Arabia, all domestic companies must be publicly listed. Middle East and North Africa: Gross Written Premiums (2007 – 2013) Middle East and North Africa: Penetration as a % of GDP (2012) Bahrain United Arab Emirates Syria Morocco Oman Jordan Kuwait Turkey Israel 1 IMF Regional Economic Outlook – Middle East and Central Asia, November 2013 2 M&A Activity, A Global Overview, 2009-2013 – Clyde & Co, 2013 Source: Insurance Intelligence Center Source: Insurance Intelligence Center
  • 28. 0 1 2 3 4 5 6 7 Kuwait Jordan Om an M orocco Bahrain UAE Turkey SaudiArabia Qatar Israel 2011 2012 2013 DealValue(US$Million) 0 5 10 15 20 25 30 201320122011 0 100 200 300 400 500 600 700 800 900 19% 23% 16% 42% Accident and Healthcare Insurance Distribution Life Insurance Non-Life Insurance 28 Global Insurance – Mergers and Acquisitions Source: Grant Thornton Research and Insurance Intelligence Center Initial IPOs have brought about strained valuations in the region, with initial share prices often trading at a discount to the underlying Total Net Asset Value (TNAV) of a company. Deal volume rose through 2011 and 2012, but dipped through 2013, likely as a result of the growing political and social unrest in the region. Despite reduced deal activity, the average deal value increased significantly from 2011 to 2012; an underlying sign of a region with strong medium-term growth prospects. While inward cross-border deal volumes remain low, countries such as Turkey and the United Arab Emirates are attracting the attention of investors seeking greater returns than in more mature markets. Interestingly, a recent survey by Baker & McKenzie found that 95% of respondents believed that their investment in ‘fragile states’ over the past five years were ‘helpful to very helpful’3 . Moreover, Baker & McKenzie found that those investing in ‘fragile states’ were more likely to be from less mature markets, such as Asia and South Africa. Middle East and North Africa Middle East and North Africa: Number of Deals and Average Deal Value (2011 – 2013) Number of Deals Average Value of Disclosed Deals Middle East and North Africa: Target Company by Subsector (2011 – 2013) Middle East and North Africa: Volume of Insurance Deals (2011- 2013) Source: Grant Thornton Research and Insurance Intelligence Center Source: Grant Thornton Research and Insurance Intelligence Center 3 Opportunities Across High-Growth Markets, Baker & McKenzie, 2013
  • 29. 0 2000 4000 6000 8000 10000 12000 14000 16000 18000 2013201220112010200920082007 US$million Global Insurance – Mergers and Acquisitions 29 1 CIA World Factbook, 2013 2 Thompson Reuters 3 Islamic Finance Outlook, Standard & Poor’s, September 2012 4 Middle East Insurance Review, April 2013 Takaful is an ancient Arab concept, relating to a pooled liability that obliges those who commit offences to pay compensation to their victims. In its modern-day manifestation, Takaful is commonly referred to as Islamic insurance. The core difference to conventional insurance revolves around cooperative principles and mutual ownership. Takaful policyholders share in, and are liable for, both the profits and losses of pooled funds; with vendors acting, effectively, as fund operators. Takaful is offered by around 200 companies globally4 , in both Muslim and non-Muslim countries. Insurance contributions in the sector have grown by 18% through 2013. Products include both Life and General Insurance risks, with a small number of re-Takaful companies emerging in core markets. Close to half of all the existing Takaful companies are based in Gulf Cooperation Council (GCC) countries, with Malaysia and Indonesia as burgeoning markets. Takaful Why Takaful? With Muslims forming over 22% of the world’s population1 and the Islamic world comprising 1.7 billion Muslims3 , this is a significant customer- base that insurers can ill afford to ignore. Indeed, Standard and Poor’s observed that, in the Islamic world, “traditional insurers and reinsurers have met with sudden and often aggressive competition from Sharia-compliant Takaful and cooperative providers”2 . While M&A activity in the Takaful segment is limited, particularly relative to traditional deal activity, as the market evolves and insurance penetration rates in Islamic growth regions increases, deal activity is likely to increase significantly. A number of recent deals have suggested a growing trend towards cross-border transactions between the Gulf and Asia. As deal volume increases, the Takaful sector will grow its credentials as a truly global insurance offering able to make significant inroads in areas that, to date, remain largely under exploited. Takaful has established itself in regional pockets to capitalise on market opportunity, Takaful requires global operators able to utilise established operational functions and leverage distribution networks to reach a far wider audience. Middle East and North Africa Global Takaful Contributions (2007 – 2013) Levant South Asia Africa GCC ASEAN Saudi Arabia Source: Grant Thornton Analysis of EY Global Takaful Insights, 2013
  • 30. Private Equity 30 Global Insurance – Mergers and Acquisitions
  • 31. 0 2 4 6 8 10 12 14 16 18 20 201320122011 0 140 280 420 560 700 840 980 1120 1260 1400 0 10 20 30 40 50 60 70 80 Services Risk M anagem ent Reinsurance Accident& Healthcare Life Insurance Distribution Channel Non-Life Insurance 0 5000 10000 15000 20000 25000 30000 35000 40000 45000 Global Insurance – Mergers and Acquisitions 31 Private Equity Private Equity With over 130 deals in the last three years, it is evident that the insurance industry has become a popular destination for Private Equity to invest in. Most deals have taken place in Europe and North America, followed closely by Asia Pacific. The insurance sector is particularly attractive for PE firms looking for investment opportunities in the current low-return market place. Europe is an attractive destination due to the low levels of political risk and the important role that insurers play in the economy. Our research shows that in recent years PE firms actively sought out non-life insurers and distribution vehicles; these are sectors where investors can achieve greater returns on investment without exposure to underwriting risk. Certain regulators around the world, especially in Asia, consider that PE firms should not own life businesses. The belief is that the social importance of this sector needs to be protected and therefore private equity houses are not the ideal owners. In a recent survey by Towers Watson, 45% of respondents saw private equity firms as a driving force behind deal-making, particularly in Europe and North America1 . 1 Towers Watson: Surviving the Perfect Storm Global Private Equity deals (2011 – 2013) Global Private Equity deals by Industry (2011 – 2013) Source: Grant Thornton Research and Insurance Intelligence Center Source: Grant Thornton Research and Insurance Intelligence Center Number of Deals Southeast Asia Europe North America Latin America Deal Value US$M Southeast Asia Europe North America Latin America Number of Deals Deal Value US$M
  • 32. Transaction Risks 32 Global Insurance – Mergers and Acquisitions
  • 33. 3.4 3.6 3.8 4.0 4.2 4.4 4.6 4.8 Pressure to instead return funds to shareholders through buybacks and dividends Other strategic priorities (capital management, expense control, regulatory challenges) Difficulty getting funding Regulatory uncertainty Concerns about capital adequacy Soft consumer demand More attractive opportunities in other regions Price expectation gap between sellers and buyers Volatile economic environment Global Insurance – Mergers and Acquisitions 33 Transaction Risks Transaction Risks As the macroeconomic environment in the developed economies improves, Boards might become less risk adverse. There is currently more clarity around crucial regulations for the industry, such as Solvency II, Global Systematically Important Insurers (GSII) and Dodd-Frank. As Clyde & Co point out: “The uncertainty around these criteria has meant that some companies have been deterred from substantial acquisitions in case that would put them into the GSII category”2 . Regulatory transparency might have a positive effect on the number of deals undertaken and, ultimately, completed. While the majority of M&A activity is focused on achieving business growth or expansion into new markets; a recent survey by AONHewitt3 found that “companies do not normally have a well defined strategy to address cultural issues”. From a peak in 2008, the number of insurance deals that have been withdrawn has steadily fallen. Nevertheless, the data on withdrawn deals is very scarce as companies avoid talking about deal failure. Impediments to acquisitions in the EMEA insurance sector Source: Towers Watson 1 Clifford Chance. “European M&A: On the road to recovery?” 2 M&A Activity, A Global Overview, 2009-2013 – Clyde & Co, 2013
  • 34. “In domestic deals, cultural differences between two organisations are a soft issue, in international M&A, culture suddenly becomes a very hard issue.” 34 Global Insurance – Mergers and Acquisitions Companies face many challenges after a deal is completed and there is no a single reason why a deal might fail; nevertheless, the integration of people and culture is one of the most important factors for the success of a deal. Although most organisations successfully identify cultural integration as a top priority, it is still the most common factor for deal failure. 0 2 4 6 8 10 12 14 Q1 2013 Q3 2012 Q1 2012 Q3 2011 Q1 2011 Q3 2010 Q1 2010 Q3 2009 Q1 2009 Q3 2008 Q1 2008 Q3 2007 Q1 2007 Q3 2006 Q1 2006 Transaction Risks Withdrawn Global Insurance Deals (2011 – 2013) Source: Thompson Reuters 3 Culture Integration in M&A, AONHewitt
  • 35. Global Insurance – Mergers and Acquisitions 35
  • 36. © 2014 Grant Thornton UK LLP. All rights reserved. ‘Grant Thornton’ refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton UK LLP is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate, one another and are not liable for one another’s acts or omissions. This publication has been prepared only as a guide. No responsibility can be accepted by us for loss occasioned to any person acting or refraining from acting as a result of any material in this publication. grant-thornton.co.uk V23558