Monte Preview: M&A mania to continue

Conditions are right for the current spree of mergers and acquisitions in the insurance industry to continue, with some interesting regional variations, writes Clyde & Co corporate insurance group global head Andrew Holderness.

With the market currently gripped by merger mania – barely a week seems to pass without news of another major transaction – there is real impetus in the market accompanied by an almost tangible sense of ‘buy or be bought’. This should not come as a surprise. What we are seeing in 2015 is an acceleration of the upturn in merger and acquisition (M&A) activity that started at the beginning of last year and is driven by a number of common factors.

Transaction drivers

The abundance of capital in the market, combined with cheap borrowing due to the on-going low interest rate environment, means there is no shortage of funds with which to finance transactions. Whereas this time last year we were seeing a preference for excess capital being deployed in share buybacks, the market has reached a tipping point where the prevailing sentiment is now directed towards deal activity that can deliver diversification, geographic reach and cost savings.

The search for growth remains paramount, especially for those whose domestic markets have stagnated. For those based in mature markets, Africa and Asia remain attractive. However, the next generation of global powerhouses is arriving from emerging economies; China’s Fosun and BTG Pactual of Brazil are just two of those that have been making significant moves into mature markets to acquire assets that can fuel their international growth ambitions.

The US remains of interest to foreign investors, especially from Japan. Although not considered high growth, the US is the largest insurance market in the world offering a range of targets and growth prospects to offset the acquirers’ shrinking home market. The world’s second largest completed deal of the last 12 months was the $5.7 bn deal for Protective Life by Japan’s Dai-ichi Life, while the announcement in the summer of the acquisition of HCC by Tokio Marine provides further evidence of this trend.

Regulation too remains a driver, especially in emerging markets. The raising of the foreign investment cap in India is likely to usher in a wave of deals while new rules recently introduced in China are starting to take effect and will result in increased levels of transactions over the coming months. The Middle East, long considered ripe for M&A, is set for a combination of domestic consolidation and inbound investment as a result of new legislation designed to squeeze out smaller players with weaker balance sheets.

Regional differences

Although we expect M&A to continue across a range of markets, challenges remain in certain jurisdictions. While in the US, the strengthening macro-economic outlook combined with on-going fierce competition in the (re)insurance marketplace – together with the factors above – suggest the conditions for deal-making will persist for the near-term, the picture in Europe is less clear. Despite a number of high profile deals, including Aviva’s acquisition of the Friends Life Group for $8.7bn – the world’s largest insurance transaction completed so far this year – M&A activity has been patchy.

This is because Europe is still beset with a number of uncertainties around issues such as regulation (e.g. Solvency II) and the overall economic picture in many Eurozone countries. While last year key economies in Europe start to show signs of sustained recovery, more recent events – for example the debt crisis in Greece and the possibility of a UK exit from the European Union – may have undermined that forward impetus. This cloud of uncertainty has delivered a strong ‘wait and see’ attitude in many countries and has acted as a brake on the number of deals.

In contrast, M&A activity in Asia Pacific has held steady over the last year or so and is predicted to pick up in the coming months. Transactions are taking place in both developed and emerging markets, with Japan leading the region in terms of deal volume. Interest in Australia is on the up, buoyed in no small part by the arrival of Berkshire Hathaway in the country this year, and an increasing number of foreign investors are looking to enter the market by virtue of acquisition or start-up.

Across the region intra-country deals continue, especially in markets with a large number of smaller insurers struggling to comply with risk-based capital requirements, while the imminent arrival of the ASEAN Economic Community is also likely to drive an increase in M&A, albeit in the medium term. Finally, there has been an increase in the number of cross-border acquisitions in Asia Pacific – nine of the last year’s ten largest deals in the region have involved overseas targets – a trend we expect to continue amid clear signs in a number of markets in this part of the world and beyond that the current surge in M&A activity is far from over.