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Ten Predictions for Growth: Trends shaping the future insurance M&A landscape kpmg.com KPMG INTERNATIONAL
Ten Predictions for Growth: Trends shaping the future insurance M&A landscape
kpmg.com
KPMG INTERNATIONAL
Many insurers are rethinking their business model in light of economic and regulatory changes, with sustainable underwriting a focus given continuing low investment yields. As insurers seek to secure profitable growth, enter new markets and rationalize non-core operations, mergers and acquisitions (M&A) are an increasingly important element of the overall strategy.
M&A activity in the insurance sector continues to be relatively buoyant, particularly for mid cap deals. Ongoing consolidation in mature markets and continued expansion in high growth markets combined with a focus on securing new distribution are driving activity.
The world is changing fast. In this publication we offer our predictions for the future together with some reminders from the past and our advice on how to maximize your chances of success.
Combining our extensive market and transaction experience and leveraging our global M&A platform we are well placed to support you in developing and executing on your M&A strategy.
Sam EvansGlobal Insurance Transactions and Restructuring Lead
Foreword
© 2014 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
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Ten predictions for M&A activity for insurers
Lessons learned from recent deals
Opportunities, challenges and success strategies for dealmakers
Contents
period KPMG member firms have been the
deal advisor for 3 years and never out of the
Source: Worldwide full market league table, based on deal volume, Thomson Financial, January 2013
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4KPMG’s global insurance M&A platform
© 2014 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
Looking at 2014 and beyond, we expect to see a dynamic deal environment with continuing appetite for expansion into core markets with the following trends shaping the future M&A landscape:
Ten predictions for M&A activity for insurers
2 | M&A outlook for the insurance sector
1Opportunities created through dramatic shifts in technology use
Step change in the use of technology is coming. High growth markets, without constraints of legacy products and infrastructure, could lead the charge, particularly by leveraging mobile technology and expanding upon the success of telematics in motor to property. Investment opportunities will be created through partnerships, joint ventures and acquisition of innovators by traditional players.
2Increasing activity and competition from private equity and non corporate acquirers
Current market incumbents can expect increasing competition from private equity, funds, and in some instances pension funds, buyers in both mature and high growth markets, building on the momentum of recent deals.
3Asia remains a competitive, heavily penetrated market but opportunities remain
More selective activity is expected, as organizations assess which markets are core for their business and what is the best entry model and partner to capitalize on the primary opportunity. Underlying fundamentals will continue to attract interest in China, India and Indonesia, particularly as the developing regulatory environment opens up the market.
4Continued activity expected in Latin America
We anticipate increasing transaction activity in Latin America as insurers look to secure position in these rapidly growing markets.
5Where next? Markets in Africa, Turkey, the Middle East attract attention
We expect to see a new horizon of high growth markets with countries in Africa and the Middle East attracting significant interest, prompting a rapid increase in M&A and distribution related transactions. We also foresee the continued evolution of alternative business models like micro insurance.
© 2014 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
M&A outlook for the insurance sector | 3
6Regulatory change continues to act as a deal catalyst
As in recent years, the continuing implementation of risk based capital and consumer protection initiatives will serve as a catalyst for change, creating investment opportunities. Specific initiatives like the Asset Quality Review for the banking sector will result in a more rigorous assessment of whether insurance businesses are considered core or could be sold.
7Rising inbound M&A interest into mature markets
In a reversal of recent deal flow, we expect more inbound investment to mature markets. For example, as Chinese and other investors look to capitalize on opportunities created by current economic conditions.
8Traditional insurers exit legacy segments/sell non-core books to focus on growth and capital redeployment
We forecast a greater focus on the management of in-force business, leading to improved internal performance but also sales to specialist carriers that can leverage technology and scale benefits. Although the challenges are significant, opportunity exists to create a pan-European platform to consolidate legacy and closed book portfolios.
9Opportunities to create core infrastructure in high growth markets
Many high growth markets lack the core infrastructure to support ongoing sectoral development, including central clearing houses and data availability and integrity. The development of this infrastructure will create investment opportunities.
10Access to data changes results in new partnerships and business models
Another step change for the industry occurs as partnerships are established to capitalize on data driven business models (eg. Google, Amazon, Apple, retailers) resulting in a fundamental change in the way insurance is bought and sold. Traditional incumbents must react.
© 2014 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
Lessons learned from recent dealsIn this active M&A environment, it is evident that opportunities abound but lessons from the past should not be forgotten. Our recent transaction experience has highlighted the following reasons why deals fail. What lessons can be learned?
Drivers of transaction failures
Importance of trust
Vendor intentions unclear
Vendor has unrealistic process expectations
Vendor has unrealistic price expectations
Regulatory restrictions create barriers
The need to build rapport and trust with the vendor is clear. This is equally important in the pre deal phase, and where an ongoing partnership exists, as well as the post deal environment.
Internal disagreements amongst shareholders selling a business can create significant uncertainty, with the buyer left unclear on the transaction perimeter, stake to be sold and valuation expectations.
It is not uncommon, particularly in high growth markets, for sellers to underestimate the level of due diligence buyers (especially foreign) will want to conduct and the extended nature of the sale process.
The gap in price expectations between buyer and seller remains an obstacle in many markets.
The regulator may place restrictions on the deal structure and in certain markets foreign investment limits exist.
4 | M&A outlook for the insurance sector
© 2014 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
Our recommendations
For joint venture deals the battle is only half won once the deal is announced. In high growth markets in particular, many insurers fail to achieve their post deal objectives. In our experience trust is a critical building block and is something that requires significant time to develop. We do not believe this process can be rushed. The rewards for the patient partner can, however, be significant.
Understanding the shareholder structure and influential stakeholders is an important first step. To the extent possible, we would always recommend agreement up front on the transaction perimeter and key terms, including broad alignment of valuation expectations to avoid subsequent frustration and delays. We also believe that in the long run it is important to not compromise core objectives to try and make a deal work.
Related to the above observation on the importance of trust, investing significant time up front with a potential target to build relationships and help them prepare for the intrusion of diligence is critical.
Where possible, we suggest avoiding competitive auction processes, but recognize this is hard to achieve in high growth markets where demand for top quality targets is often high.
We recommend regular dialogue with regulators in key target markets to build a strong working relationship and enable you to test transaction concepts in advance with the regulator.
M&A outlook for the insurance sector | 5
© 2014 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
Opportunities, challenges and success strategies for dealmakers Recognizing both the underlying opportunities and the associated challenges, we highlight key aspects of the transaction environment that will be critical to future success.
Many insurers recognize M&A as a crucial means to increase their distribution capacity. As a result, careful attention should be given to managing multiple channels and optimizing distribution as part of your transaction strategy, in addition to meticulous post-deal planning.
If the acquirer is operating in the same market, the deal brings access to a wider customer base, often with new insights into both existing and prospective customers, alongside operational economies of scale. However fulfilling this potential may require further investment in areas such as data and predictive analytics. Once better understood, the combined customer base can be re-segmented to target an enhanced and re-focused portfolio of propositions.
A transaction may also create new opportunities, such as maximizing cross sell potential with a new bank partner, integrating agency teams or establishing insurance sales through a new retail partner. For insurers in the midst of a journey to become more customer centric, post-deal integration can prompt a complete review of the buyer’s channel management strategy, creating a “best of both worlds” distribution proposition. The acquisition may plug a much-needed gap in the existing channel/product portfolio or provide new capability, whether it be skilled advisors, technology or channel management expertise. At the same time, it can provide an opportunity to divest of channels that do not fit well into the new model.
Integration of channels creates a number of challenges for the acquiring firm as brands are merged, product ranges rationalized and product features amended. Customer issues are critical factors for success, since customer expectations must be managed, with an eye on maintaining service levels throughout the transition. Client satisfaction is often closely related to employee morale, including internal and external agents. In most cases, people impacted by the acquisition are unlikely to welcome the changes unless they understand the wider benefits to the insurer, customers and employees.
There is also a lengthy list of operational issues to consider across systems, people and process. For instance, integrating two separate digital offerings will take time, potentially delaying some of the anticipated integration synergies.
Integration often reveals post-deal surprises that must be addressed. Capability may not be as strong as you thought or “sleeping” regulatory risks may come to light, such as historical agent mis-selling.
This means that buyers must keep value, and the strategic rationale for the deal, front of mind to realize the projected benefits. They must have a clearly defined approach to integration, understand and be prepared to manage cultural differences, identify and track transition and post-deal performance against clearly defined goals. These include maintaining service standards and meeting the expectations of stakeholders including customers, employees and regulators.
6 | M&A outlook for the insurance sector
M&A to increase and expand distribution capability
Effective post-deal integration
© 2014 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
Many deal-seekers under-estimate the challenges associated with separating a business, particularly when separating an insurance company from a bank. This can have a significant impact on both transaction parties in terms of deal delays, new operational risks, added costs and lost asset value. For example, the seller may not have performed adequate evaluation of business value and is under-prepared for discussions with potential buyers, enabling the purchaser to negotiate discounts on sale value.
The vendor must consider both the practicalities of separating an asset or business line and also how the group company will operate post-deal, particularly if there are cross-business dependencies or dis-synergies created. For example, separated entities may not be fully standalone at deal close,
requiring vendors to prepare Transitional Service Agreements (TSAs) to ensure deal integrity and clarify range and price. By overlooking the complexity of separation, including people, processes, assets, contracts and interdependent technologies, key issues may not be identified until late in the deal process, resulting in delays and additional costs.
For these reasons, successful separations require a highly-structured, strategic approach to thoroughly prepare a business for sale, maintain operational integrity during the transition and ensure that comprehensive plans are in place to carry-on business as usual post-deal. By doing so, early and in-depth separation planning can enhance valuations by up to 30 percent, while also improving execution, reducing risks and optimizing the value of the remaining business.
While insurers see fresh opportunities in new markets, justifying rising pricing multiples, there are vast challenges in completing a successful M&A in an unfamiliar geography. Recently intensified competition means that bidders must differentiate themselves from the pack and prepare offers that demonstrate value and fit for the local partner. Acquirers also face increasingly complex regulatory hurdles, which can cause significant delays or impose cumbersome post-deal operational burdens or costs.
Abandoned deals or problematic integrations can result from a buyer’s inability to understand or navigate foreign culture and values among the seller, partners, regulators, customers
and employees. As a result, successful buyers must gather detailed market intelligence and tap into knowledgeable local players to better appreciate on-the-ground conditions, culture and operating considerations.
The prospective buyer should also carefully map out their M&A strategy and approach, precisely identifying underlying goals for the acquired asset and how they will achieve growth. Without such in-depth, upfront strategic reflection, buyers can find themselves invested in the wrong market, with the wrong partner, or lacking clearly defined post-deal direction.
M&A outlook for the insurance sector | 7
Successful post-deal separation
Entering new markets with the right strategy and partner
© 2014 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
8 | M&A outlook for the insurance sector
To ensure we have the highest level of support to satisfy our clients’ M&A planning and execution requirements, we have established an integrated global network of multi-disciplinary M&A professionals focused on the insurance sector. Our dedicated insurance teams provide strategy, market entry, due diligence, restructuring, valuation, separation and integration and M&A advice across mature and high growth markets.
Our approach ensures in-depth local market experience is complemented with global deal experience, customized to individual assignment requirements. The result is an impressive track-record of M&A deal support and a roster of leading global insurers who have turned to us to help ensure their transaction ambitions and activities achieve their strategic business objectives.
KPMG’s global insurance M&A platform is positioned to help you achieve your objectives
© 2014 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
M&A outlook for the insurance sector | 9
• achievecorporategrowth,realizesynergy potential and profit objectives
• createandexecuteonawelldevelopedgrowth strategy
• releasecapitalandenhanceliquidityfrom sale of core or non-core businesses
• restructureorwinddownofnoncorebusinesses
• implementanoptimalseparationplan
• tailorM&Aadvicetoensureasuccessfuloutcome when assessing opportunities
• identifyawidepoolofpotentialopportunities in your core markets
• understandvaluedrivers,opportunitiesand risks related to a potential acquisition target
• designandexecuteaneffectivepostdeal integration plan
Our network of member firms across the world can help you meet your M&A goals:
© 2014 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
Contact us
Sam EvansGlobal Insurance Transactions andRestructuring LeadKPMGinSwitzerlandT: + 41 48 249 55 63E: [email protected]
Mike WalkerGlobal InsuranceRestructuring LeadKPMG in the UKT: + 44 20 7694 3198E: [email protected]
Ferdia ByrneGlobal Insurance Actuarial LeadKPMG in the UKT: + 44 20 7694 2984E: [email protected]
Navdeep AroraPartner, Insurance StrategyKPMG in the UKT: + 44 20 7311 5647E: [email protected]
Mark WilliamsGlobal Separation and Integration Lead, InsuranceKPMG in the UKT: + 44 20 7694 8041E: [email protected]
Rob LantGlobal Insurance M&A Tax LeadKPMG in the UKT: + 44 20 7311 1853E: [email protected]
Americas
Georges Pigeon PartnerKPMG in CanadaT: +1 514 840 2178E: [email protected]
Laura HayAmericas Coordinating Insurance PartnerKPMG in the UST: + 1 212 872 3383E: [email protected]
Ram Menon PartnerKPMG in the UST: + 1 212 954 3448E: [email protected]
Leslie Fenton PartnerKPMG in the UST: + 1 312 665 2754E: [email protected]
Luciene T. Magalhaes LATAM Coordinating Insurance PartnerKPMGinBrazilT: + 55 11218 33144E: [email protected]
Marila Melo PartnerKPMGinBrazilT: + 55 11 3245 8337E: [email protected]
Asia Pacific
Simon Donowho ASPAC Coordinating Insurance PartnerKPMG in ChinaT: + 852 2826 7105E: [email protected]
Joan Wong PartnerKPMG in Hong KongT: + 852 2140 2862E: [email protected]
Kenichiro Kato PartnerKPMG in JapanT: + 813 5218 6408E: [email protected]
Jin Man Kim PartnerKPMG in KoreaT: + 822 2112 0786E: [email protected]
Siew Mei Chan PartnerKPMG in MalaysiaT: + 603 7721 7063E: [email protected]
Europe, Middle East and Africa
Gary ReaderGlobal Head of Insurance andEMA Coordinating PartnerKPMG in the UKT: + 44 20 7694 4040E: [email protected]
Mark Flenner PartnerKPMG in the UKT: + 44 20 7311 4226E: [email protected]
Benjamin Tarac PartnerKPMG in FranceT: + 331 5568 7381E: [email protected]
Ralf Baukloh PartnerKPMG in GermanyT: + 49 69 9587 3440E: [email protected]
Silvano Lenoci DirectorKPMG in ItalyT: +39 0267 6431E: [email protected]
Sofia Isabel Delgado Mendes PartnerKPMG in SpainT: + 349 1456 5905E: [email protected]
Roger GascoigneCentral Europe Coordinating PartnerKPMGintheCzechRepublicT: + 42 02 2212 3481E: [email protected]
Gerdus DixonPartnerKPMG in South AfricaT: + 278 2492 8786E: [email protected]
Dapo Okubadejo PartnerKPMG in NigeriaT: + 234 1280 9268E: [email protected]
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accu-rate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
© 2014 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
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Designed by Evalueserve. Publication name: Ten Predictions for Growth: Trends shaping the future insurance M&A landscape Publication number: 131142 Publication date: May 2014
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