More deals forecast as Asian firms open their wallets

The unique set of forces driving Asian companies to acquire insurers and reinsurers with a global reach shows little sign of abating and will lead to more mergers & acquisitions (M&A) in the future, analysts have told EAIC Today.

Two more deals this month illustrated this trend with Sompo Japan Nipponkoa Insurance buying Endurance Speciality for $6.3 billion, while two investment corporations owned by the Chinese state—Shenzhen Qianhai Financial Holdings (QFH) and Shenzhen Investment Holdings (SIHC)—are set to acquire ACR Capital Holdings, the holding company of Asia Capital Re.

These recent deals follow Mitsui Sumitomo Insurance acquiring Amlin for £3.5 billion, Fosun International buying Ironshore for some $1.8 billion, and Tokio Marine paying $7.5 billion for HCC Insurance, all in 2015. In addition, China Minsheng Investment bought Sirius for $2.6 billion earlier this year.

Sid Ghosh, vice president and senior analyst at Moody’s, said the rationale many Asian buyers use when considering acquisitions is different from that of many companies in the west and means that such deals look attractive despite the considerable pressures on re/insurance globally.

“Over the past few years, there have been a number of acquisitions by Asian buyers, including the Sompo/Endurance deal, which appear to be less sensitive to the high price to book values and place more value on reinsurers as a way to add meaningful US/European cash flows to their businesses,” Ghosh said.

“In the case of Japanese buyers, they have been aided by a strengthening currency, and incentivised by tepid growth prospects in their home markets. Therefore, while pressures on the reinsurance industry will encourage more consolidation, it is more likely that we will continue to see more deals where a larger diversified company is buying a reinsurer, as opposed to mergers among reinsurance peers.”

Sompo Japan Nipponkoa Insurance indicated quickly in the aftermath of the Endurance deal that it is open to further deals and that Endurance may represent only the start of an acquisition spree.

It has said it wants to become one of the ten biggest corporations globally. “We are trying to become one of the top ten global enterprises. To do that we still have a gap and the Endurance transaction is not enough to fill it,” a senior executive said in the aftermath of the deal being revealed. “In terms of mid-term perspective we do not deny the possibility of further acquisitions.”

Brian Schneider, global head of reinsurance at Fitch, said these recent deals are confirmation of a trend that has been in place for several years now.

“The Sompo and ACR deals are really more of a continuation of the existing global dynamic of reinsurance, which extends outside only Asian buyers.

“We have seen several recent reinsurance deals driven by global diversification, including Fairfax’s purchase of Brit in July 2015, Sumitomo’s purchase of Amlin in February, Exor’s purchase of PartnerRe in March and China Minsheng Investment’s purchase of Sirius in April, all this year.”

More M&A

Ghosh said that Moody’s expects more M&A activity in the reinsurance sector driven by this dynamic, although not at the same pace as 2015, when nine large M&A deals were announced.

The main reasons it is forecasting consolidation include the soft market and the resulting need to find cost synergies; a desire to diversify into different lines of business, including specialty lines and primary insurance which are relatively less affected by margin compression; and the need for scale to provide coverage across many lines and geographies in order to serve the needs of global primary insurers.

Ghosh added that the pace of consolidation has slowed in 2016 compared to 2015 partly because of the rich price to book values for many reinsurers and the relatively small number of high quality reinsurers franchises left to be acquired.

“Moody’s currently has a negative outlook for the global reinsurance sector due to the abundance of capital and tepid demand for reinsurance, which together continue to place pressure on reinsurance pricing and drive reinsurers’ profitability lower. We believe the smaller and less diversified reinsurers will be potential targets for future acquisitions.”

The rationale behind QFH and SIHC acquiring ACR Capital Holdings is a little different. They are looking to increase their investments in the reinsurance industry more generally but also to develop Shenzhen Qianhai into a regional reinsurance hub.

Li Qiang, chairman of QFH, said: “On the one hand, QFH would utilise ACR’s platform and professional advantages, consolidating global insurance capital or resources and developing professional insurance products and services, to provide comprehensive risk management solutions for the ‘Going Global’ Chinese enterprises.

“On the other hand, we would open up the Qianhai–Asia–international insurance industry chain to form a strong agglomeration and demonstration effect, and make Qianhai the national centre for reinsurance.”