Surviving the Perfect Storm - Towers Watson

Surviving the Perfect Storm The Outlook for Insurance M&A in EMEA

October 2013

Surviving the Perfect Storm The Outlook for Insurance M&A in EMEA

Table of Contents Foreword

04

Methodology

05

Executive Summary

06

EMEA Insurance M&A

08

Global M&A Spotlight

18

Feature: Deal or No Deal?22 About Towers Watson26 About Mergermarket28

Surviving the Perfect Storm: The Outlook for Insurance M&A in EMEA 3

Foreword There are many factors that make the insurance sector in the EMEA (Europe, Middle East and Africa) region fertile ground for M&A activity, including: • Multinational and regional players with high growth ambitions • Growth opportunities in product niches and innovation • Structural changes to the regulatory landscape Unsurprisingly, the uncertainties of the financial crisis have had a marked effect on insurance deal-making in recent years. But with signs emerging of a recovered appetite for doing deals within the insurance sector, Towers Watson wanted to dig deeper in to how the industry currently views M&A conditions and opportunities.

Ground-breaking report Historically, billions of pounds, euros and dollars have been spent on transaction activity every year. While many deals in the insurance sector succeed, others fail to achieve their objectives. What will mark the winners from the losers in the years to come? Where is the renewed deal-making appetite coming from? How will it be financed and are the indications of growing interest in insurance from private equity sources here to stay? Our first survey of senior insurance M&A executives from across Europe and the world, carried out in conjunction with Mergermarket, a global proprietary M&A intelligence provider, offers insights into these questions and more.

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Over the last few months, researchers have been in contact with senior executives with M&A responsibilities from all branches of the insurance industry – life, P&C and composites – to gather their wealth of knowledge and opinions of what the future state of insurance M&A looks like.

Current thinking Responses have confirmed an increasing wave of enthusiasm for doing deals, with nearly double the number of respondents saying they expect to do a deal in the next three years, compared to those that have completed a transaction in the last three years. Behind the headline numbers, we have investigated the motivations for these sentiments. We have also explored the expectations from such activity – in terms of target return on equity. It has to be said that this seems to reveal a disconnect between some lofty ambitions and what, in our view, is likely to be achievable in the near- to mid-term.

Deal or no deal M&A has always been, and will remain, a growth strategy fraught with risk. The risks go way beyond the financials, with the success of many deals hinging on cultural fit and winning over the hearts and minds of people from both organisations. Accordingly, the senior insurance industry executives interviewed for this survey provided incredibly frank insight of what concerns them most when trying to make M&A deals successful.

Source: Thinkstock

Sometimes, these concerns mean walking away from a deal, even when substantial amounts of time, expense and, in most cases, personal commitment and energy of the senior executive team have already been poured into it. Research shows that the most successful deal-makers are, in fact, those that can look at a transaction objectively and walk away if it doesn’t make sense. To add to the views of those interviewed, our feature Deal or No Deal (page 22), investigates that idea, with a review of the success factors that acquirers in the insurance industry are likely to want to apply to a deal.

Latent demand?

Fergal O’Shea Life M&A Leader, EMEA fergal.o’[email protected] +353 1 614 6820

Andy Staudt P&C M&A Leader, EMEA [email protected] +44 20 7886 5146

Altogether, we believe this report gives a comprehensive evaluation of the latent demand for M&A transactions building up within the insurance sector, based principally on the first-hand opinions of those deciding and influencing growth strategies. We would be delighted for you to further share your own opinions on the insurance M&A market with us, or if you would like to discuss any aspects of the report in more detail.

Methodology Towers Watson has canvassed the opinions of 255 senior insurance executives from life, P&C and composite insurers as well as reinsurers regarding their outlook for M&A in EMEA’s insurance sector as well as their own company’s plans and strategy. Topics covered include the key drivers and impediments of M&A, EMEA’s relative attractiveness compared to other parts of the world, the types of companies expected

to drive deal-making and the impact of regulatory changes such as Solvency II. The interviews were conducted either by telephone or online and all responses are anonymised and presented in aggregate. Though we had non-EMEA respondents, the criteria for inclusion in the survey were EMEA domicile, or where non-EMEA domicile, the respondents had operations in EMEA or were otherwise active in the region. Surviving the Perfect Storm: The Outlook for Insurance M&A in EMEA 5

Executive Summary Source: Thinkstock

The volume of insurance M&A transactions in the EMEA region fell sharply at the start of the financial crisis. Activity has been gradually increasing since the low of 2009, but is currently still well below pre-crisis levels. But this could all be set to change. Our survey respondents anticipate the level of activity will increase markedly in the next three years. Large companies and private equity funds are expected to drive consolidation in developed markets, where insurance penetration is high and the economic environment has been leading to depressed returns. Meanwhile, multi-national insurers are expected to push harder to acquire attractive assets in developing markets that provide a promise of growth and increased (but arguably riskier) returns. But haven’t we heard this before? Is this just more of the same, or are things really likely to be different this time? On the theme of consolidation, respondents believe that Solvency II is likely to support acquisition activity in the EMEA region, in spite of ongoing delays, as small players struggle under the increased regulatory burden and large acquirers selectively seek diversification benefits. While having a focused niche brings expertise, the regulatory playing field is being tilted more towards the multi-line, multi-territory insurers with the resources and financial strength to achieve scale in several different markets – mainly those insurers where new business in their home markets remains at low levels.

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When discussing growth, acquisition activity will be driven by companies looking for access to new customer segments, distribution capabilities and technical expertise – all factors that will support long term, organic growth, but often only available in the short-term through selective acquisition of existing niche providers. While the survey respondents demonstrated a degree of home region preference in considering acquisitions, there was also a noticeable sense of attraction for the Asia-Pacific region as being a preferred destination, irrespective of the buyer’s home region. Our survey also shows an expectation of increased capital raising in the next three years, although it is not clear that this would be used explicitly to fund new acquisitions. A substantial proportion of companies are considering external capital raising options, although relatively few are planning securitisation or capital restructuring options, despite the recent securitisation deals in Spain. We find this surprising given that this is an area where we have seen significant activity recently. For a number of insurers, it is likely that these alternative options could (effectively) raise the same level of capital in a more cost-effective manner.

How will this change the insurance market? We expect that the European insurance market will consolidate and be dominated by fewer but larger companies. Incumbents will de-risk their substantial back-books to release capital and new business will be focused on “capital-lite”

Large multi-nationals that are headquartered in Western Europe will aim to seek diversification to become less reliant on the traditional home markets, and will increasingly focus on developing markets in Asia-Pacific and Latin America. The premise is that the expansion of these developing markets should support sustainable growth, and it looks to be an imperative strategic step for firms to consider, or else run the risk of being left behind by their competitors in faster-growth markets. As the fallout from the credit crunch subsides, there are a number of reasons to expect a real change in the European insurance market in the reasonably near future. However, despite some green shoots sprouting recently, the general economic outlook across Europe remains fragile, and the future regulatory position in Europe – although perhaps relatively clearer than in recent years – remains a source of uncertainty. However this uncertainty is also bringing opportunity for those firms that are well-positioned to take advantage. With three successful insurancerelated IPOs in London recently, there is clear investor appetite for select assets in the insurance sector, and some market participants are now looking to the future with more confidence. However, the average minimum return on capital required by respondents when assessing an acquisition was still relatively high at around 14% to 17%. We think that this hurdle rate could prove an obstacle to some deals, as a lot of potential targets are unlikely to generate this level of return. This is particularly the case when looking at consolidation in developed markets, and achieving this level of return will generally require large expense savings or other synergies to be delivered. Such operational saving projects carry significant risk and could struggle to generate this level of return, particularly if actual future growth does not match expectations. The survey points to a future M&A environment where insurers should feel cautiously optimistic. However, the need to effectively manage transactions (“deal cycle”) has never been so important if the long term benefits are to be successfully delivered.

Overall outlook

Solvency II

77%

55%

Respondents foresee an increase in M&A activity in the insurance sector over the next one to three years

Respondents who say potential capital requirements resulting from Solvency II regulations are likely to promote acquisitions over the next one to three years

Required return on capital by region In valuing a company, what is the minimum required return on capital?

Western Europe 13.8%

Americas 14.1%

(Global average = 15.2%)

products wherever possible (for instance, asset management type products in the life insurance segment). However, niche players that innovate with new products and technologies will continue to thrive, and it is interesting to see how the growth of usage-based insurance is materially changing the motor market in North America and increasingly now in Europe.

AsiaPacific 16.0%

Central & Eastern Europe 16.7%

Africa & Middle East 17.2%

Top three challenges Before closing the deal

€

Establishing a valuation that is acceptable to both parties Finding a quality target Getting the buy-in of management of the target company

After closing the deal Realising the predicted financials Differences in corporate culture Aligning strategy of acquired company


EMEA Insurance M&A Source: Thinkstock

While still a long way from the pre-crisis peak, deal-making in the EMEA insurance sector has been steadily increasing over the past four years by both volume and value. In 2012, the value of deals came in 15% up on the previous year and in 2013 this trend looks likely to continue, with the value of deals done in the first half of the year more than twice that seen during the same period of 2012. Underpinning this uptick are a number of key drivers, including: the quest for greater scale in response to depressed premiums and the incurred costs of regulatory changes; a desire to expand

in faster-growing emerging markets; and the forced divestiture of assets by capital-constrained diversified financial institutions. The results of our survey suggest the trend for increasing activity is set to continue and perhaps accelerate, with 69% of respondents indicating their company plans for some type of acquisition activity over the next three years, compared to 39% who indicated they made an acquisition during the past three years. Similarly, 77% of respondents anticipate that M&A activity in the insurance sector will increase in the next one to three years.

160

60

140 50

Deal Value (€bn)

Deal Volume

EMEA Insurance M&A Trends

120 40 100

80

30

60 20 40 10

H2 20 H1 0

0 2005

Deal Volume

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2006

2007

Deal Value (€bn)

2008

2009

2010

2011

2012

H1 2013

2013 Annualised Volume and Value Legal Copy: 6/7 White Photograph Attribution

Please indicate any M&A activity your company has undertaken or is planning, including any acquisitions or disposals: Percentage of respondents 0%

10%

20%

30%

40%

50%

60%

70%

80%

Acquisition 39% 69% Divestment 34% 20% Merger 5% 4%

Past three years

Next three years

In general do you foresee an increase or decrease in M&A activity within the insurance sector over the next one to three years?

How are the potential capital requirements resulting from Solvency II regulations likely to affect your company’s M&A plans over the next one to three years?

1% 22% 34%

55%

77%

Decrease

11%

Likely to promote acquisitions

Increase

Likely to promote divestments

No change

No impact

This is borne out in comments from a German life insurer: “It is time for the insurance companies to take charge and lead growth. Economic recovery has again opened the doors for them and insurance companies will try to seize the opportunities before the competition gets intense. Acquisitions will help insurance companies in not only increasing their market share, but also will help them in diversifying their products and services.” Interestingly, only a fifth of respondents say they are planning a divestiture, down from the 34% that have made a divestiture, suggesting the possible emergence of a seller’s market, with the resulting competition for assets and elevated valuations. Alternatively, the lack of respondents planning divestments could be due to concerns over potential sale prices, or that many of the previously planned divestments have already taken place. An uptick in buyer demand and

valuations could therefore be promptly matched by a flurry of assets coming to the market, with firms that had previously held off divesting returning to the market and keeping prices in check.

Solvency II will drive deal-making Despite its maturity, the insurance sector across EMEA remains fragmented. The UK is the most concentrated market, but even in this region there are a number of small- and medium-sized businesses that could be likely takeover targets. The need for significant consolidation in search of economies of scale was demonstrated by the high number of deals in the years leading up to the financial crisis. This trend is likely to gather momentum again as the economic environment becomes more conducive to deal-making.


Please rate the following factors on what you consider will be the most significant drivers of acquisitions in the EMEA insurance sector over the next one to three years. (Rate on a scale of 1-6, where 6 = most significant) Mean 3.50

3.70

3.90

4.10

4.30

4.50

4.70

General economies of scale 4.6 Strategic intention to expand into new geographies/sectors 4.6 Difficulty of organic growth given depressed economy 4.4 Opportunities afforded from market exits due to “core consolidation” strategies 4.4 Opportunities afforded from distressed/forced sellers 4.2 Opportunities afforded from new regulations (e.g. Solvency II, Basel III) 4.2 Attractive prices (e.g. from distressed/forced sellers) 4.0 Low cost of financing (and/or perceived need to utilise accumulated cash resources) 3.6

“The insurance market looks fragmented with many small players struggling due to financial crises or regulatory changes,” suggests the CEO of a UK-based insurer. Our survey suggests that Solvency II has so far not had a significant impact on deal-making, with only 9% of respondents stating that concerns about the regulatory environment had pushed them to undertake a significant M&A transaction in the past three years. This may be because uncertainty around Solvency II and the implementation efforts surrounding it have been an impediment in the past. However, a less volatile environment could cause firms to ramp up their preparations as they return to their strategic agenda. Going forward, the impact looks likely to be greater, with some 55% of respondents saying that Solvency II regulations are likely to promote acquisitions, and only a marginal difference has been seen across the different insurance subsectors. Notably, only 11% of respondents think that these changes will promote divestments. This may seem to suggest that there are not many books of business that are capital-constrained books or that are out of line with their owners’ strategy. However, it may also be a signal that many are seeking to acquire to alleviate the

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impact of Solvency II through diversification and economies of scale to avoid a potentially complex and costly restructuring process. While firms with focused niches often bring expertise, the regulatory playing field is being tilted more towards multi-line, multi-territory insurers with the resources and financial strength to achieve scale in several different markets. Reflecting both the changing regulatory environment and the increased predisposition towards M&A, the survey points to an anticipated increase in capital-raising over the next three years.

Factors behind M&A vary across sectors While an expected uptick in acquisitions is seen across insurance sub-sectors, the key motivation for deal-making varies by company type. For life insurers, general economies of scale are rated as the most important driver. In contrast, for P&C, composite and reinsurance firms, expansion into new territories and sectors is paramount, indicating a sustained desire for diversification both by product type geography and greater returns. “Intention of expanding in new geographies is essential for European companies

Please rate what you consider will be the main impediments for acquisitions in the EMEA insurance sector over the next one to three years. (Rate on a scale of 1-6, where 6 = largest impediment) Mean

3.50

3.70

3.90

4.10

4.30

4.50

4.70

4.90

Volatile economic environment 4.71 Price expectation gap between sellers and buyers 4.54 More attractive opportunities in other regions 4.38 Soft consumer demand 4.20 Concerns about capital adequacy 4.20 Regulatory uncertainty (e.g. Solvency II, Basel III, other) 4.13 Difficulty getting funding 4.03 Other strategic priorities (e.g. capital management, expense control, dealing with regulatory challenges) 4.03 Pressure to instead return funds to shareholders through buybacks and dividends 3.96

because they are not able to get any growth in the domestic market. Africa, Middle East and APAC are some of the growing markets where the insurance sector has demand and opportunities,” notes a UK-based P&C Insurer. This reflects the particular challenges facing P&C insurers in the Western European region, but also reflects the immaturity of the insurance sector in many of the world’s most important emerging markets, with P&C having generally been faster to develop. Across all sectors, the commonly held view that there are limited opportunities to achieve organic growth was seen as a key driver of M&A. Mature markets and high levels of competition across Europe make it difficult to deliver dynamic growth through existing operations alone. Across all sectors, respondents also highlight opportunities afforded by firms exiting certain markets to focus on their core operations. This is seen as a particularly prominent driver of M&A in the composite and life insurance sectors. In contrast, few in the survey pool saw the availability of attractive prices as a key driver of M&A, despite pressure on premiums, low interest rates and low growth putting a dampener on valuations across the sector and many firms currently trading below their book or embedded values. The low cost of financing

was also not rated highly, with the low cost of debt not seen as a significant factor in driving through deals. However, this could be an indication of an expected continuation of the prolonged low interest rate environment, thus any sign that rates could start to rise is likely to have a significant impact on how this factor is assessed.

But impediments are consistent Across all insurance segments, the key constraints on deal-making are consistent. Respondents cite the volatile economic environment, the pricing gap between buyers and sellers and the availability of more attractive opportunities in other regions as the top three reasons why deal-making in EMEA is not more prolific. But the macroeconomic landscape in EMEA is showing some signs of improving, with confidence boosted by stronger economic data, a rally in equity prices and a pick-up in yields. While this may lead to higher valuations, it should also serve to improve the attractiveness of the region for buyers, albeit with firms still contending with high levels of competition and suppressed demand.


In valuing a company what is your minimum required return on capital? Percentage 10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

16.0%

17.0%

18.0%

Middle East & Africa 17.2% Central & Eastern Europe 16.7% Asia Pacific 16.0% Americas 14.1% Western Europe 13.8%

Regional average required ROC

15.2%

Global average required ROC

If your company is actively considering acquisitions, what is the most likely focus for this activity? Percentage of respondents 0%

10%

20%

30%

40%

50%

60%

Acquisitions to access new customer segments, distribution capabilities, product expertise and/or other technical or operational capabilities 55% Opportunistic acquisitions – if the right deal comes along then might proceed 43% Expansion into new geographies 27% Expansion into new sectors in existing geographies 27% Bolt-on acquisitions in existing geographies and segments 25% Large, transformational acquisitions (where “large” is relative to the size of your company currently) 18%

Pricing gaps between buyers and sellers also remain a major obstacle. With the market valuation of many firms below their book or embedded values, it is not surprising that insurers are unwilling to sell at current valuations. In the P&C market, there is increasing capacity in the London market coming from Asia, as well as an increasing prevalence of alternative capital entering the market via broker-facilities, sidecars and insurance linked securities increasing the pressure on premium rates and profitability for incumbents. However, this price gap is also related to the underlying economic environment, which has put downward pressure on growth projections. A gradual improvement in the underlying environment should therefore help to support valuations, and make it

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easier for firms on both sides of the deal to justify transactions. Valuation gap challenges are reflected in the high minimum return on capital required by respondents when assessing an acquisition: across all insurance sub-sectors, the survey results show respondents are seeking an average return of 15.2%, with this rising to 17.2% for respondents from the Middle East & Africa, but at the lower rate of 13.8% in Western Europe. This rate may be an obstacle to many deals, as only a limited number of targets will likely generate such high returns. Especially when looking at consolidation in developed markets, returns of this level generally require large expense savings

or other synergies to be delivered – and of course any transformation, restructuring or expense saving programmes come with significant execution risk.

Transformational deals on the back burner? For respondents actively considering acquisitions, some 55% say this is to gain access to new customer segments, distribution capabilities, or expertise. All of these factors support long term, organic growth, but are often only available in the short-term through the selective acquisition of existing niche providers. “For us it is very important that we provide the best and most efficient services to our customers to win their confidence. We will try to better our services by improving our capabilities and extending our products and services to customers through M&A,” states a Western European life insurer. At 27%, many respondents are turning to M&A to expand into new geographies or to enter new segments in existing geographies. This strategy is particularly common among firms operating in markets heavily impacted by the downturn.

renewed enthusiasm for larger deals. Some of these transactions are driven by the continued fallout from the financial crisis, such as the Government of the Netherlands taking control of SNS Reaal for €2.2bn, as part of a necessary injection of capital. We have also seen some large transactions motivated by consolidation and expansion, including Canada’s Great-West’s €1.3bn acquisition of Irish Life, Cinven/Hannover’s €300m acquisition of Heidelberger Leben and UK-based life insurer Phoenix Group’s potential tie-up with Swiss Re’s Admin Re unit, which could be worth around €3.5bn. These moves suggest that more optimistic deal drivers could be coming back in the near-term.

Global insurers and private equity showing increased interest The potential for an increase in deals aimed at expansion and consolidation is supported by the type of firms expected to drive deal-making in the EMEA insurance industry: large global insurance companies (55%) are seen as the main instigators of M&A, followed by large single-market insurance companies (48%).

A quarter of respondents are considering bolton acquisitions in existing geographies and segments, while only 18% are considering large, transformational acquisitions. The limited appetite for transformational purchases is in line with the current deal size breakdown in the insurance sector, with only an average of five deals greater than €500m taking place each year since 2009. This compares with 23 deals greater than €500m in 2007 alone, and points to continued trepidation among deal-makers, despite the opportunities currently afforded to them by low valuations. But the climate may be changing. In 2013 to date, at the time of writing, five transactions greater than €500m have been announced, suggesting


What types of companies do you foresee driving acquisition activity in the EMEA insurance industry? Percentage of respondents 0%

10%

20%

30%

40%

50%

60%

Large, global insurance companies 55% Large, single market insurance companies 48% Non-European companies (e.g. Asian, American etc) 47% Regional or sub-regional insurance companies (e.g. EMEA, CEE) 46% Private equity houses 45% Small local insurance companies 42% Other financial services companies (e.g. banks) 33% Other new market entrants (e.g. distributors, technologists, “brands”) 23% Lloyds and London Market 18%

Please rate each of these regions based on the attractiveness for pursuing insurance acquisitions. (Rate on a scale of 1-6, where 6 = most attractive) Mean 0

1

2

3

4

5

6

Asia-Pacific 4.98 Latin America 4.57 Central & Eastern Europe (Eastern Eurozone, Russia, Other) 4.31 Africa 3.93 Middle East 3.89 North America 3.83 Western Europe 3.80

Nearly half of respondents (47%) expect that non-European companies will play a major role in EMEA-based insurance M&A. There is evidence of EMEA-based assets being seen as more attractive. For instance, North America-based acquirers in particular account for 16 deals worth a total of €2bn in 2012, and five deals worth €1.6bn so far in 2013.

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Meanwhile, some 45% of respondents see private equity firms as a driving force behind dealmaking. This chimes with an uptick in private equity interest in the sector over the past few years, with 26 buyouts worth €2.2bn between 2011 and 2013. Private equity firms are being tempted by historically low valuations and are increasingly stepping in when firms divest assets in non-core sectors or

regions as part of their response to the new capital adequacy requirements. While many of these private equity-backed deals are below €50m, there have been several larger deals including US-based Aquiline Capital Partners’ €107m acquisition of UK motor insurer Equity Red Star, as well as the Cinven purchase of Heidelberger Leben.

Emerging market expansion a priority The muted M&A market in Western Europe can be attributed partly to the availability of more exciting opportunities perceived in emerging markets. Reflecting this, respondents currently view regions with rapidly growing markets as the most attractive for pursuing acquisitions. By some distance, Asia-Pacific remains the most attractive market. Meanwhile, Latin America is seen as the second-most attractive region, and CEE is rated as the third-most attractive region for M&A investment. Unlike Western Europe, the CEE’s insurance sector is delivering steady growth and is relatively immature, helping to drive investment and consolidation. A French composite insurer commented: “The market is expected to continue to deliver significant growth in the developing world of Eastern Europe, APAC, Latin America and Africa and most of the M&A activity will happen in these areas. Western Europe and North America have not yet emerged from the crises and even companies there will be looking outside of their region for growth.”

market presence requires scale; in other words, activity in CEE becomes part of the acquirer’s core strategy, as evidenced by the recent large acquisitions in CEE together with disposals of sub-scale operations. Africa and the Middle East are viewed as the next most attractive target destinations. However, this is slightly at odds with these regions’ low contribution to global M&A by value, indicating that investors are yet to consistently follow up this positive sentiment with hard cash. Western Europe is currently viewed as the least attractive place to pursue acquisitions. Large multi-nationals headquartered in Western Europe are increasingly likely to seek geographical diversification, in the hope of becoming less reliant on their home markets. Expansion into developing markets, such as Asia-Pacific, Latin America and faster-growing parts of EMEA, should support sustainable growth. However, with the number of available deals dwindling (particularly in the Asia-Pacific region), overseas expansion looks to be an increasingly pressing strategic step for firms that otherwise run the risk of being left behind by their competitors.

In part, CEE’s attractiveness is reflected in the level of deal-making – in 2013 the region accounted for 26% of EMEA deals by value and 17% by volume, up from 6% and 14% in 2012, respectively, representing the region’s highest proportional share of the last eight years. However, recent activity suggests that a successful CEE


Looking at this data by the region of the respondent there is evidence of a ‘home bias’, with respondents from each region viewing their own region as more attractive than respondents from elsewhere. Other interesting results from this analysis (albeit with the caveat of relatively small sample sizes in Asia-Pacific and the Americas) include the limited interest in Africa or Western Europe by respondents from the Asia-Pacific region, as well as a universally positive view of the Asia-Pacific region, and a surprisingly favourable opinion of Western Europe for respondents based in the Americas. It is an interesting contrast that while firms in markets such as China, Russia and the Middle East are all vying for influence in developing markets, our survey suggests that few are currently looking to exploit the market expertise and experience within the insurance sector in Western Europe.

A look to the future The European insurance market is expected to consolidate further and gradually be dominated by fewer, larger companies. Although medium and smaller operators are often takeover targets for their larger counterparts, there will always remain room for niche players to thrive with innovative new products and technologies. This is exemplified

by the success of usage-based insurance, which is materially changing the motor market in both North America and increasingly Europe. Meanwhile, regulatory changes and stricter capital requirements mean that new business will be focused on “capital-lite” products wherever possible. While management still have plenty of reasons to continue to wait it out if they choose, firms that do so may run the risk of “playing catch up” – particularly regarding emerging markets and nascent technologies. There are clearly many other challenges that need to be navigated both pre and post deal, not least the importance of establishing a valuation that is acceptable to both parties and realising the predicted financials seen as the most significant issues. That said, the usual M&A guidelines still ring true – deals should link to strategies, and while identifying new or emerging markets or trends that seem attractive, firms should remember that the best deals will get done when all parties fully understand the choices available to them, and the value of each of these choices. These vital issues are covered in greater detail in Deal or No Deal (p22).

Please rate each of these regions based on the attractiveness for pursuing insurance acquisitions. (Rate on a scale of 1-6, where 6 = most attractive)

Respondents’ Region

Target Region Mean Rating Africa

AsiaPacific

CEE

Latin America

Middle East

North America

Western Europe

Americas

3.7

5.1

4.2

4.9

3.8

4.7

4.0

Asia-Pacific

3.4

5.1

3.9

4.3

4.0

3.8

3.4

CEE

4.0

5.1

5.3

4.6

4.2

4.1

3.9

Middle East & Africa

4.9

5.2

4.1

4.6

4.1

3.8

3.6

Western Europe

3.7

4.9

4.2

4.5

3.8

3.6

3.8

Global mean

3.9

5.0

4.3

4.6

3.9

3.8

3.8

< 3.4 (least attractive)

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3.5-3.9

4.0-4.4

4.5-4.9

> 5.0 (most attractive)

Are you realising the expected value in your transactions? Towers Watson advises on all aspects of the deal cycle Helping acquirers and sellers achieve their objectives

Respondents to the Towers Watson 2013 M&A survey indicated their average required minimum return on capital to be 15%. In the current market conditions achieving a return of this level is likely to be a challenge requiring companies to actively manage the deal cycle and optimise their capital deployed. Towers Watson experts advise leading acquirers and sellers on all aspects of a transaction from strategy and planning through to due diligence and integration.

For proven world leading M&A expertise talk to Towers Watson.

Towers Watson. A global company with a singular focus on our clients. Benefits Risk and Financial Services Talent and Rewards towerswatson.com Copyright © 2013 Towers Watson. All rights reserved. TW-EU-2013-34185a. October 2013. Towers Watson is represented in the UK by Towers Watson Limited and Towers Watson Capital Markets Limited.

Global M&A Spotlight Source: Thinkstock

Worldwide, M&A in the insurance sector proved very strong in 2012, with the second highest level of deal-making by value of the past eight years. Looking historically, activity in H1 2013 was more muted, but still increased by 44% over the previous year. So far in 2013 the EMEA region has accounted for 53% of insurance deal-making by value, up from 24% in 2012, indicating a steady flow of very large deals, which have so far been less forthcoming in both Asia and the Americas. In the Asia and Americas regions, there have been no deals worth more than €1bn in 2013 so far, and only five deals between €500m and €1bn, all of which took place in the Americas,

not Asia. Three of these five deals took place in the US, with Protective Life Corporation acquiring MONY Life Insurance Company, France-based SCOR SE taking control of Generali USA Life Reassurance Company and Enstar Group and Stone Point Capital acquiring Torus Insurance Holdings. Meanwhile, one deal took place in Canada with Travelers Companies taking control of The Dominion of Canada General Insurance Company and another in Mexico with Grupo Financiero Banorte acquiring the 49% stake that it did not already own in Seguros BanorteGenerali and Pensiones Banorte Generali from its joint venture partner Generali.

180

80,000

160

70,000

140

60,00

120 50,000 100 40,000 80 30,000 60 20,000

40

10,000

20 0

0 H1 2005

H2 2005

Deal Volume

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H1 2006

H2 2006

H1 2007

H2 2007

Deal Value (€m)

H1 2008

H2 2008

H1 2009

H2 2009

H1 2010

H2 2010

H1 2011

H2 2011

H1 2012

H2 2012

H1 2013

Deal Value (€m)

Deal Volume

Global Insurance M&A

Value (€bn)

Global Insurance M&A Regional Breakdown by Value (€bn) 120.0

97.0

100.0

75.2

80.0 67.4

18.3

59.4

58.9

16.5

41.0

1.7

53.2

36.6

40.0 0.6 20.0

64.2 0.4

60.0

30.4

49.6

23.4

14.6

2.0

2.4

10.8

6.9

2005

2006

2007

Asia

EMEA

7.0 1.7

11.8

2.9 2008

In the US, a reduction in the number of large deals in 2013 compares to a massive flurry of crisis-induced M&A during 2010, including AIG’s €36bn bail-out by the US Government, and fairly robust activity in 2011 and 2012 including AIG’s sale of Alico to MetLife for €11.4bn. As in Europe, deal-making is being driven by consolidation as a response to depressed premiums and more stringent capital requirements. This is pushing firms to expand into new product areas to diversify risk and to maximise return on capital. This expansion has often been difficult to achieve by organic means. On the sell-side, firms are often looking to raise funds for expansion in more enticing markets overseas. A notable example in 2013 is Protective Life Corporation’s €811m deal for MONY Life Insurance Company from AXA. For AXA, the move will help raise financial resources to expand into emerging Asian markets. Meanwhile, Protective is motivated by increased scale in its core sector and a steady and predictable stream of earnings. In Bermuda, consolidation is also a key theme, particularly among reinsurers that have limited strategic differentiation. This activity is increasingly being oiled by private equity funding. With the island home to the world’s second-largest reinsurance industry, there is room for a sizeable uptick in consolidation-led deal-making. This is exemplified by the largest deal of 2013 so far, which saw

3.7

14.0 15.3 3.7 1.5

10.4

18.2

11.8

17.7

2009

2010

2011

2012

Latin America

North America

1.7

25.5

12.2

10.7

17.1

0.0

2.8

29.8

25.5

8.1 2.0 2013

North America

Bermuda’s Enstar Group Limited team up with private equity firm Stone Point Capital to acquire Torus Insurance from private equity owners First Reserve Corporation and Corsair Capital for €541m.

Latin America The insurance market in Latin America is currently the world’s fastest growing, helping to fuel a buoyant M&A market. A steady flow of deals means that the region has accounted for 9% of global deals by both value and volume in 2013 – the highest proportion of the past eight years. In most Latin American countries, the insurance sector is relatively immature, with economic growth and the use of alternative broker channels fuelling expansions in both life and P&C sectors. This is driving consolidation as well as a steady flow of inward investment, as major global insurers are eager for exposure to this dynamic region. Domestic consolidation has been a key theme in Chile. The country has already seen several significant deals this year, including financial conglomerate Grupo Security’s €231m acquisition of life insurer Cruz del Sur. Consolidation is also key to the Mexican insurance M&A landscape. In 2013, ACE has acquired one of the top five motor insurers in Mexico Aba Seguros and surety company Fianzas Monterrey, reinforcing its focus within Mexico. ACE has been present in the Mexican market for some years, but has struggled to achieve organic growth.


In Brazil, there is a high level of international interest. This is exemplified by France’s CNP Assurances using its Brazilian P&C subsidiary Caixa Seguros Brazil to acquire a 70% stake in Brazilian life insurer Previsul Seguradora – a transaction that will strengthen Caixa’s operations in Southern Brazil and is in line with the firm’s strategy of expanding its geographic coverage and distribution channels. Further, both international and local reinsurers have continued to bring capital into Brazil as a result of the opening of the reinsurance market in 2008. At the time of writing, AGCS Re and Zurich Re opened operations in Brazil in 2013.

Asia The markets of South-east Asia, and Indonesia in particular, have been very hot over the last two years or so as acquirers look to take advantage of expected high growth in both population and per person wealth. Together with currently low levels of insurance penetration, the ASEAN region remains very attractive for acquirers based in developed markets. But as transaction prices have increased, the number of players willing and able to deal at such valuations has decreased. The focus has moved acutely to the potential attractiveness of distribution and customer access and importantly, of course, the ability to successfully extract optimal value from those opportunities going forward.

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Restrictions on foreign ownership mean that deal-making in life insurance in the potentially giant markets of China and India has mostly comprised small percentage changes in domestic shareholdings. Markets that have seen the highest levels of activity are notably Indonesia, and increasingly Malaysia and Thailand. There has been a growing interest from foreign acquirers, with inbound deals including, most recently Japan’s Dai-ichi Life Insurance Company agreeing to acquire a 40% stake in Indonesia’s PT Panin Life for €259m and AIA Group stepping in to take control of ING’s Malaysian insurance arm for a total consideration of €1.34bn – a deal which significantly enhances AIA’s bancassurance distribution through the addition of a long term bancassurance arrangement with Malaysia’s Public Bank. In Thailand there has been the recent acquisition of Thanachart Life by Prudential and Meiji Yasuda’s investment into Thai Life. Distribution and customer access to seize the huge growth opportunities remain key objectives in life insurance M&A deals in the Asia-Pacific region. In the P&C sector in China and India foreign ownership constraints are not so restrictive, but foreign operators still account for only a tiny share of the market. Immaturity and high levels of growth mean that the P&C market is likely to attract

Deal Volume

Global Insurance M&A Deal Size Split 300

250

200

275 243 228

222

231

83 213

203

79 74

67

177

30

71

94 75

150

100

36

36

26

59

58 69 34

50

0

69

73

35 18 12

15

19

21

2005

2006

15 40

2007

>€500m

€251m-€500m