On the same wavelength: understanding the needs of Asian (re)insurance investors

 

In a new era of Asian (re)insurance buyers, what lessons can be learned from previous M&A waves, and how should buyers bridge any cultural divide? Bill Cooper, Managing Director, Global Head of Insurance and Richard Askey, Managing Director, Head of Specialist Insurance from Lloyds Bank Commercial Banking explore the options.

Bill Cooper

Bill Cooper

Managing Director,
Global Head of Insurance,
Lloyds Bank Commercial Banking

Richard Askey 1

Richard Askey

Managing Director,
Head of Specialist Insurance,
Lloyds Bank Commercial Banking

Today, we are seeing another wave of overseas money coming to invest in the London market: how is this wave different from the investors who bought into the market following other events, such as 9/11 and Hurricane Katrina?

Bill Cooper: Today, we have a softening market which is pressuring profitability, which in turn is pressuring members of the market into M&A.

There is also a scarcity value to some of the platforms that operate in the London market, making them highly prized assets. That’s why we’re seeing prices for London market-based insurance firms at a high level, which is counterintuitive given the market conditions.

Investors from various parts of the world see London as a platform from where they can run a globally significant business. And that is driven by the cluster of expertise which makes it advantageous to trade through London, such as the banking, accountancy and legal firms that support the market, along with Lloyd’s of London.

What is it that London market insurers are looking for from prospective Asian parent companies?

Richard Askey: I sense they are looking for a partner who brings perhaps greater global access and additional capital. The parents have long-term return on equity expectations and appear to favour steady growth. In addition, Japanese firms in particular have a reputation for leaving acquired firms as they are, rather than undertaking a significant investment and re-engineering the businesses. Generally, they recognise the businesses are run effectively with high quality management.

Potentially, it also provides the acquired firm with access to new competitively priced, long-tenured capital markets access, giving them a broader range of options on how to structure their capital in the future.

What lessons could new Asian buyers take from the more established acquirers, such as Mitsui Sumitomo and Tokio Marine?

Bill Cooper: When Tokio Marine bought Kiln and Mitsui bought Amlin, they bought because they were good quality businesses. The success of overseas investors who have bought London firms has been that they’ve used the London market business as a platform for growth in their non-domestic business.

Richard Askey: There’s a general feeling that the Japanese in particular carry out a long and thorough due diligence process. They’ve got a strategy, but they’re not rushing to execute it. They want to be comfortable with the management, culture and the ethos of the business they’re acquiring.

Bill Cooper: If you think about the current regulatory environment, it’s more intrusive than it has been in the past, which suggests that you can charge a decent premium on a firm which has all of its regulatory affairs in order. Investors must take great care in understanding the regulatory environment and the relationship between the target firm and their regulators.

Richard Askey: That’s amplified with Mitsui/Amlin. There is very strong focus on enterprise risk management, certainly on par with their reference to capital and underwriting.

We’ve also seen a new breed of investors in recent months, such as China Minsheng and Fosun – what differences do they bring?

Bill Cooper: These are diversified investors, which appear to be looking at these investments as a way of asset gathering through an insurance firm, which isn’t dissimilar to how Berkshire Hathaway operates. It’s early days for these firms. There are a few questions: will they leave them alone as Berkshire Hathaway does? We don’t know, but it does provide a different angle and way of looking at M&A.

Richard Askey: As they’re so diversified, it potentially allows them to give more thought to the asset side of the balance sheet. For example, Fosun has an asset management business and I would expect them to consider working the investment returns for Ironshore a little harder.

Do you see this trend for Asian investors acquiring Western insurers continuing, given the market turmoil in China in particular?

Bill Cooper: The short answer is yes. The interesting question is how far can it go? There are limits in terms of the local rules governing potential ownership of overseas assets, of course, but everything we’re hearing suggests it will carry on for now.

Richard Askey: If you look at real estate in particular, it tends to be the trophy assets – as it is with the Lloyd’s of London acquisitions. They’re looking for yield and investment returns, but they’re not prepared to go down the quality curve.

What cultural barriers are there to overcome and is it important to become part of the local fabric when you’re acquiring abroad?

Bill Cooper: The cultures are very different, which means the approach is markedly different. Our experience is that it’s very important to get on the same wavelength as your investors, which means you have to be there regularly, as long-term relationships really matter in these markets.

There is an interesting question about whether you need physical presence on the ground in these markets. Others question whether it’s enough to have local people able to talk to them, but not necessarily house them in the same place. At Lloyds Bank we’re experimenting with having a single base in Singapore to reach into the other nearby major economies.

While you mustn’t lose your local expertise, it is crucial to get into these new markets and meet them on their wavelength.

Footnotes

This article first appeared in insurance trade magazine, The Insurance Insider with the title ‘Understanding buyers’ needs’.

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