- Cross-border M&A in the insurance sector surged to US$83bn in 2015, more than three times the total deal value in 2014
- The surge was fueled by four megadeals valued at more than US$5bn each, compared to just one deal that size in 2014
- Japan and Switzerland were the most active buyers in 2015 by value, accounting for US$22.5bn and US$31.4bn in deals respectively, while the US was the most active buyer by volume with 16 deals
- China has become an increasingly active player in the tech sector, rising to become the third-largest acquirer in 2015 after the US and UK
Last year was a banner year for cross-border M&A in the insurance sector, fueled by megadeals targeting the US and high levels of deal activity in Asia Pacific. Despite a slight decline in the number of transactions, total deal value surged to US$83bn in 2015, more than triple the US$25.8bn in deals announced in 2014.
Outbound activity was strongest from Asia Pacific and Europe, led by Japanese insurers pursuing seven deals worth US$22.5bn, including three megadeals targeting US assets. Swiss investors announced four deals worth US$31.4bn, the bulk of that value coming from ACE’s acquisition of US-based Chubb for US$28.3bn — the largest insurance deal ever.
As a result, more than half the value of global M&A activity in the sector last year came from deals targeting the US, totaling US$47.9bn.
After a blockbuster year, M&A activity among insurers slowed in the first quarter of 2016, with only 14 deals worth US$1.2bn, compared to 24 deals worth US$9.4bn in Q1 2015. Despite the slow start, there is still cause for optimism.
“Insurance companies tend to look at things with a longer time focus than other companies because they’re used to matching assets and liabilities over 50-year periods,” says Craig Roeder, an M&A Partner in Baker McKenzie’s Chicago office. “It may be a sector that continues to be active despite what the broader market is doing.”
After focusing on acquisitions primarily in Asia Pacific for the past five years, Japanese insurers recently turned their attention to bigger targets in the US, UK and Australia. Even though the growth rates in these developed markets are relatively low, they are still attractive to Japanese insurers facing negative population growth and below zero interest rates at home. The result was three megadeals involving US targets in 2015, amounting to US$16.2bn. By comparison, Japanese buyers pursued just one US megadeal worth US$5.7bn in 2014.
This surge in cross-regional activity was driven largely by Japan’s four largest life insurers — Dai-ichi Life, Meiji Yasuda Life, Nippon Life and Sumitomo Life — starting with Dai-ichi Life’s acquisition of US insurer Protective Life for US$5.7bn, the largest acquisition ever by a Japanese life insurer.
“The competition between these four players is very tough so Dai-ichi’s acquisition of Protective should have motivated the other three life insurers to catch up with Dai-ichi by swiftly pursuing their own acquisitions,” says Jiro Toyokawa, an M&A Partner in Baker McKenzie’s Tokyo office.
However, more megadeals are unlikely this year as Nippon Life is the only one of the four that hasn’t made a large US acquisition yet and the others are likely taking stock of their new assets.
“For Japanese insurance companies that have bought in the US, it may make sense to integrate these acquired businesses and use them as a platform for bolt-on acquisitions, rather than immediately pursuing additional large acquisitions,” Roeder says.
Middle class drives AP expansion
Asia Pacific has also become a popular destination for insurance deals. India, for example, was the third-biggest target by volume in 2015/16 with eight inbound deals, including BNP’s plans to increase its stake in SBI Life by 10%. Nippon Life also increased its stake in Reliance Life, one of the largest insurance companies in India, from 26% to 49%.
The best markets for insurers are those with mid-level population growth and consumers with the means to buy insurance products, which makes Asia’s growing middle class, estimated to be 525 million people, very attractive. Despite these promising demographics, however, foreign investment rules in many emerging Asia countries can obstruct market entry.
“Malaysia is seen as a promising market but its government does not issue new licenses,” Toyokawa says. “New entrance is not possible unless someone is willing to sell an existing insurance company.”
New opportunities in tech
While disruptive technology, from big data to the Internet of Things (IoT), has helped banks and other financial services engage more directly with consumers, insurance companies have generally been slower to adopt similar technology, likely because they tend to interact with their customers less frequently.
There are signs, however, this may be changing. Last year ACE acquired a 24% stake in online insurance comparison company CoverHound and John Hancock bought Guide Financial, which offers automated financial planning tools.
Eye on the future: three key trends to watch
- Resistance to volatility: Insurers tend to take a long-term view so M&A activity in the industry is unlikely to be as influenced by short to mid-term market volatility.
- Stable valuations: With a finite number of buyers and sellers in the market that can do larger transactions, both sides may be more open to negotiation on valuations as the pool becomes smaller.
- Non-life sector tech: IoT technology and big data assets could become major targets for non-life insurance companies looking for products designed to prevent the hazards they insure, such as appliances with built-in fire detectors that could allow them to offer lower premiums and attract customers.