Mergers, acquisitions driving in-roads into new insurance markets

Commissioner for Insurance Fola Daniel

By Modestus Anaesoronye

Securing new operational license for starting insurance business in most markets have become increasingly difficult and almost a non-option, a situation that has led to a growing number of mergers and acquisitions as the working strategy for new entrants, investigations have revealed.

For instance, while government through the National Insurance Commission (NAICOM) has said it would no longer give fresh licenses for doing business in Nigeria, entrants into the market particularly foreign firms, have largely been driven by mergers, acquisitions and partnerships.

Of recent is the coming into the Nigerian market of Old Mutual through acquisition of Oceanic Insurance belonging to Eco Bank. Before now are other foreign players like Sanlam of South Africa in FBN Insurance; NSIA in Adic Insurance; Metropolitan Life in UBA Metropolitan.

Within the local market also are key acquisitions seeing the likes of Custodian and Allied taking over Crusader plc; ARM taking over CrystaLife; Capital Alliance taking over SpringLife and many others.

CRE in new report into future insurance mergers and acquisitions (M&A) trends from KPMG International, says insurers at global levels are rethinking their business model in light of economic and regulatory changes and focusing on sustainable underwriting in the face of continuing low investment yields.

Sam Evans, global insurance transactions and restructuring lead, KPMG International: "As insurers seek to secure profitable growth, enter new markets and rationalise non-core operations, M&As 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. Consolidation in mature markets and continued expansion in high growth markets combined with a focus on securing new distribution are driving activity."

The report identified 10 trends for M&A activity for insurers: Opportunities created through dramatic shifts in technology use; increasing activity and competition from private equity and non-corporate acquirers; Asia remains a competitive, heavily penetrated market but opportunities remain; continued activity expected in Latin America; Markets in Africa, Turkey, the Middle East.

Other are regulatory change continues to act as a deal catalyst; rising inbound M&A interest into mature markets; traditional insurers exit legacy segments/sell non-core books to focus on growth and capital redeployment; opportunities to create core infrastructure in high growth markets; access to data changes results in new partnerships and business models.


Regional opportunities
The report highlights the opportunities in Africa, Turkey, and the Middle East as also attracting 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," said the report.

It added that investment isn’t a one-way street. "In a reversal of recent deal flow, we expect more inbound investment to mature markets. For example, as Chinese and other investors look to capitalise on opportunities created by current economic conditions," it noted.

The continuing implementation of risk based capital and consumer protection initiatives will serve as a catalyst for change, creating investment opportunities, said the report. It also pointed out: "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."


Right strategy, right partner
KPMG stressed that it was important to enter new markets with the right strategy and partner. "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," the report said.

"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."

KPMG added: "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."

The report warned that abandoned deals or problematic integration 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," the report concluded.


Source Businessday