More M&A activity is expected this year. We take a look at the notable deals in 2015, the challenges, and what can be done to improve the odds of creating a successful union.
Value of insurance-focused M&A deals in 2015 exceeded US$111 billion, “a record high for recent years”, according to EY’s “Global insurance M&A themes 2016”.
Despite a 15% drop to 565 in the volume of deals compared to 2014, the total value of deals rose by 73% driven by megadeals. The top 10 global insurance deals accounted for $74 billion or 67% of deal value. (See Figure 1.)
Notably, five of the top 10 deals were by Japanese groups investing largely in the mature US and UK markets.
M&A drivers
According to KPMG’s “Insurance M&A trends” review of 2015, the high levels of M&A activity were driven by insurers seeking new or expanded opportunities in select high-growth markets. It also noted that “the year was also marked by an impressive volume of reverse deal flow as acquirers from Asia, particularly China and Japan invested in mature markets, such as Europe and the US”.
Other factors it cited include the positive regulatory developments being the catalyst for the deals, such as the increased foreign direct investment (FDI) limits in India; companies focused on divestments of non-core or under-performing assets; large broker players which sought to build geographic reach or specific capability; and the active alternative capital providers which completed deals in the insurance sectors across mature and high-growth markets.
For EY, it stated that the key driver has been the underlying transformation of the sector. Insurers are not simply engaging in large deals in search of greater scale. Large-scale M&A is playing its part as one of the key enablers for transformation – one of the key ways of accelerating the journey toward a desired future model.
Asia to be centre of M&A activity
The high number of transactions looks set to continue this year with Asia “expected to be a centre of M&A activity over the next three years”, according to a survey of senior insurance executives by Willis Towers Watson M&A Risk Consulting. More than half of the 750 respondents to the survey see Asia as the marketplace where activity will rise most significantly.
In 2015, the value of deals with an Asian target was four times as high as 2014, at EUR19.1 billion (US$21.3 billion), while the value of deals with an Asian acquirer was nearly five times as high, at EUR43.3 billion.
News coming out from Asia in the first quarter of this year seems to support the view. Japan’s top insurers look set to continue pursuing M&A abroad in search of opportunities given the matured domestic insurance
market.
Japan and Korea activities
Nippon Life Insurance’s President Yoshinobu Tsutsui hinted earlier this year that the insurance giant is seeking M&A deals in the US. It had bought smaller rival Mitsui Life Insurance and National Australia Bank’s insurance business last year, but Mr Tsutsui said the insurer still has JPY1 trillion (US$8.8 billion) to spend on further acquisitions.
Other than Nippon Life, Tokio Marine Holdings, MS&AD Insurance Group, and Dai-ichi Life Insurance have all indicated that they are aiming to pursue overseas expansion opportunities.
In Korea, a life insurance association executive was quoted in local media saying that a series of M&A is expected in the domestic market this year, with Allianz’s Korean unit, ING, KDB Life Insurance and PCA Life Korea among the insurers cited in the media report.
Tough competition
However, with greater attention and expectations around M&A activity, the level of competition in a transaction has increased.
Mr Jack Gibson, Global M&A Leader for Willis Towers Watson M&A Risk Consulting, said: “Competition for the best transactions is tough. Just 4% of deals proceeded without competition from other potential buyers. Incumbent local insurers are fighting hard, international competitors are also trying to cherry-pick the best deals, and an increasing threat is posed by emerging players such as private equity and non-insurance investors from Asia.”
Issues emerge after closing
And “a significant number of M&A transactions worldwide may see issues arise from breaches of deal terms discovered after closing”, according to a study of AIG’s representation and warranties (R&W) insurance claims data between 2011 and 2014.
AIG revealed that nearly 14% of the M&A policies it wrote globally resulted in a claim. Financial statement misrepresentations were the leading cause of these claims, accounting for 28% of all claims during the period. Tax errors or misrepresentations were the second most frequent claim type, accounting for 13% of filed claims, followed by 11% of claims filed due to discrepancies that emerge from a company’s contracts. And the study found that clients in the Asia Pacific region were the most likely to file claims with some 18% of policyholders in the region reported a claim during the study period.
“Transactions pose risks to a significant number of companies, despite the best efforts during due diligence. Even the most sophisticated and largest companies can and do miss critical issues during the deal process,” said Ms Mary Duffy, Global Head of M&A Insurance, AIG.
When two become one
Once the challenges of competition and deal completion are overcome, what are the ingredients needed to create a successful M&A union?
According to EY, the top three lessons learnt by insurers from their recent M&A integrations are:
Resourcing: Despite continuing pressure on business-as-usual (BAU) margins and the scale of regulatory change, releasing sufficient resources to work on the integration is essential to success. Of the insurers surveyed, 58% involved more than 50 dedicated full-time equivalents (FTE) in an integration.
Planning: Integration planning needs to commence alongside due diligence and build momentum thereafter. Sixty- four percent of insurers on average now have a synergy and integration plan in place at signing, rising to 100% for deals more than $1 billion in value.
Execution: Establishing and then maintaining the right integration programme governance, management and controls are necessary to ensure that the acquirer and target collaborate effectively, that functional areas do not operate in silos and that integration work streams collectively focus to achieve the target operating model.
The importance of integration was highlighted by EY, which noted that “there is significant integration activity happening in the market across all regions, with almost $1 billion of cost synergies being targeted by the Ace-Chubb, Willis-Towers Watson and XL-Catlin mergers alone” and that “whatever the value drivers for any deal are, effective integration planning and rigorous execution are critical to both enable value creation and protect the inherent value of the business-as-usual (BAU) operations of both the acquirer and target”.