Emerging risks | Growth Opportunities | APAC Insurance
Emerging risks | Growth opportunities | APAC insurance
The art of the deal
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Data from S&P Capital IQ shows that deal valuations in APAC have been steadily falling over the past 10 years. In 2015 and 2016, the average deal valuation was up to 1.75 times book value. This has now fallen to just over one times book value.
However, at the same the current price-to-book ratio is less than the announcement ratio – a reversal of the trend that existed a decade ago.
This suggests that historical trends have failed to realise their potential, underscoring the importance of creating synergies and aligning any new purchase with group strategy.
This is where strategy becomes very important.
“While valuations of the core franchise are important, acquirers will look to the strategically optionality along with the synergies – revenue and expense – that they can bring to the target, coupled with the financing arrangements. These all play an important role in driving valuations,” says Justin Ward, Head of Capital Advisory, APAC for Guy Carpenter.
“At this point in the cycle in Asia, we would say it is the search for distribution and product reach to drive inorganic growth. Over time and as the targets are integrated, an increased focus will be placed on cost synergies, capital structure and optimizing the reinsurance strategy.”
For Generali, which has been on the look-out for good deals for some time, things are starting to look pricey.
“For some markets, the valuation expectation has increased to a very high level,” says Chan.
However, Generali is still prepared to make a purchase, as long as the synergies are in line with its existing business.
“Core financial metrics – such as cash flows – are of course very important, but we need to make sure that any new acquisition is a good strategic fit,” says Chan. “We follow a strict and disciplined M&A framework. All acquisitions must fit our strategic priorities.”
There are several important questions to ask for every new deal, says Vinay Dhareshwar, Generali’s Head of Strategy and Business Development for Asia: “Has the target company made the right investments in technology? Does it have a unique position in the market? Does it have the right people in place? Does it offer new possibilities for product distribution, such as bancassurance channels? These are all very important considerations.”
Some lessons about how to approach the Asian markets could come from what Japanese insurers have been doing in the United States.
For well over a decade, the country’s three largest insurers – MS&AD, Sompo and Tokio Marine – have been making a series of acquisitions. In August, Sompo paid $3.5 billion to acquire Bermuda-based Aspen, which has a large book of US business.
“Japanese insurers look for high-quality companies that have a capable and well-respected management,” says Teruki Morinaga, Director for Insurance at Fitch Ratings Japan. “They apply strict risk management policies from head office but delegate the daily operations to trustworthy local teams.”
A lack of opportunities in the home market has pushed these insurers overseas. With each of three incumbents already owning a 30% share of the Japanese non-life market – according to Morinaga – there is limited opportunity for them to grow, at least at the pace that they would like.
Morinaga says that the Japanese strategy of maintaining local teams and rewarding senior managers for notable successes has worked well in the US so far. Japanese insurers are now looking at applying this approach to APAC, he adds.
“Japanese acquisitions in the US over the past 10 to 15 years have been quite successful, and a lot of this has to do with the hands-off way they approach the management,” says Morinaga. “When they buy a new company, they try to retain the current CEO. We expect this strategy to continue.”
Japanese insurers are particularly interested in opportunities in Southeast Asia. In media interviews, Tokio Marine’s CEO, Masahiro Koike, has said the business has US$10bn firepower to spend in overseas acquisitions, and that he wants to increase the amount of profit that comes from Southeast Asia from 6% to 15%. Mitsui Sumitomo Insurance Company, fully owned by MS&AD, now claims to be the largest provider of insurance in Southeast Asia, based on gross premiums written.
“The US is by far the largest non-life insurance market in the world and will continue to provide a steady stream of profits, but Japanese insurers are playing a longer-term game,” says Morinaga. “The smaller size of Southeast Asia means that it might not be profitable over the next five or 10 years. But what about over the next 30, the next 40, the next 50? Japanese insurers need to sow the seeds now to reap the benefits later.”
The focus on strategic alignment means that insurers generally want to have the largest stake in any acquisition. However, many APAC markets still impose strict foreign investment caps. This could prove a limiting factor for future aspirations.
“US, London and Australia are all very open markets. Japanese companies can acquire 100% stake very easily, but in Southeast Asia this is not easy to do,” says Morinaga. “It is not impossible – at least in certain markets – but it is certainly not easy.”
A more supportive stance towards foreign ownership may therefore help boost the M&A market. Some regulators in the region are already taking steps in this direction.
Thailand, for instance, has issued proposed guidelines, spelling out under what conditions foreigners can apply for a greater stake in insurance companies in the market. The default cap is 25%, but this can be increased to 49% with approval from the regulator. Proposed changes to The Foreign Business Act 1999 should simplify the approval process and address nominee shareholdings. More generally, Thailand is considering economic reforms to boost slow economic growth, including the facilitation and attraction of foreign investment
“This lack of clarity has been a real deterrent for investors in the market, because of the difficulty of being a minority shareholder and the need to find local partners to work with. This change will help support greater M&A activity there,” says Hodgkinson.
India is also considering changes to foreign ownership of domestic insurance companies, potentially raising the cap from 74% to 100%.
“Any relaxation of foreign investment caps will play an important role in the shape of M&A insurance in APAC,” says Dhareshwar from Generali. “If insurers know they can gain strategic control of an asset, they are more likely to make the purchase, even if valuations have become heated.”
