Mergers, acquisition drives growth activity for markets

The insurance sector’s appetite for targeted mergers and acquisitions(M&A) which grew throughout 2014, with continued confidence and strong balance sheets resulting in a steady flow of deal activity across many of the core global insurance markets continued in 2015, analysts have said.

Though many companies tried to remain with brand identify, the need to for synergy and capacity to take up on big ticket risks remain key drivers. At the beginning of 2014, KPMG Internationals Deal Advisory practice published a short report titled, Ten Predictions for Growth: Trends shaping the future Insurance M&A landscape.

The predictions focused primarily on the importance of high growth markets and the impact of technology, alternative buyers and regulation. As KPMG professionals supported clients throughout the year, it became evident that many of the predictions were unfolding as expected, with some surprises along the way.

A Year in Review: Drivers and trends that shaped Insurance M&A in 2014, published in December, provides a good overview of the deals and market conditions that influenced the landscape throughout the year. We do not expect to see a fundamental change in the nature or volume of deal activity in 2015, assuming there are no significant macro-economic shocks, says the KPMG report. However, we do anticipate subtle changes in focus and geographic areas of interest, it said.

Additionally, the world’s largest corporates are expected to show an increased appetite for M&A deals and will likely have more capacity to fund prospective transactions in the rest of 2015, according to the latest analyst expectations in KPMG International’s Global M&A Predictor. This bodes well for expected deal activity across financial services.

In this year’s ‘Trends’ report, we have grouped our predictions for M&A activity under four broad drivers: importance of high growth markets; impact of regulation; efficiency and focus AND consolidation.

Developing markets

The pace of change in developing economies brings diverse challenges and opportunities. As companies look to take advantage of opportunities, where the newly elected government has eased the restrictions for investors, or in Africa, where countries such as Nigeria and Kenya are resizing their GDPs to show the true value of their markets, the doors are open for a variety of businesses to enter.

For Insurance, there are a number of important ways that high growth markets are expected to influence the M&A environment this year.

The African region, and in particular Sub Saharan Africa, is becoming increasingly important to the insurance community. While the markets are still relatively immature and unable to move the dial of a large corporation in the short-term, the longer-term prospects are significant. The potential for Africa is supported by positive demographic change. The population is expected to double in size by 2050, a developing middle class (forecast GDP per capita growth of 28.6 percent between 2013 and 2019) and the adoption of technology, particularly leveraging mobile technology to grow financial services, present many opportunities. Excluding South Africa, insurance penetration remains close to just 1 percent of GDP. We saw a number of global insurers, as well as insurance groups from South Africa, look to capitalize on this underlying opportunity and complete deals in 2014. We expect this trend to continue, and indeed, increase in 2015.

Regulation

Regulation remains perhaps the most important driver, with a unique ability to quickly and fundamentally change the market landscape and, accordingly, potential for M&A. Relevant areas of regulation include changes in foreign ownership restrictions, capital reform and conduct regulation.

The increase in FDI limit is expected to act as a catalyst, helping the industry re-discover growth after a challenging period, while encouraging an increased focus on innovation, international best practice and improving standards which in turn will drive better customer experience.

As a result, we expect to see a significant uptick in activity as existing Joint Venture (JV) partners consider whether to increase their stake, and new entrants are attracted to the market. Furthermore, there is potential for consolidation within the market and the increase in capital created through increasing foreign participation will be a further enabler.

Modestus  Anaesoronye