M&A deals are picking up after two years in the doldrums
Since a high point in the second half of 2012, the number of completed deals has trended steadily downwards as a range of economic and political factors across Latin America has acted as a brake on mergers and acquisitions (M&A) activity, write Clyde & Co corporate insurance group global head Andrew Holderness and Latin American team head Stirling Leech.
However, a corner may have been turned. There were eight deals in the first five months of 2015 compared to 11 completed throughout 2014 and 19 the year before. While it is still too early to tell if this uptick in activity will be the start of a sustained resurgence in M&A, a number of factors suggest we should expect more transactions in the short- to medium-term.
Domestic consolidation, outbound expansion
There is evident regulatory pressure for fewer, stronger insurers, which is leading to greater consolidation in the market as companies make divestments in order to comply with changing capital requirements. The majority of deals that have been completed so far this year are indicative of this trend. In Brazil, DG Participacoes Ltda bought both Fapes Administradora and Unifocus Administradora while COI Clinicas Oncologicas was acquired by Amil Assistencia Medica. In Chile, Principal Institutional acquired AFP Cuprum SA and Aseguradora Magallanes was bought by Inversiones HDI Ltda – both moves that can be seen as a direct result of regulator’s recently introducing new risk-based capital model.
As this process of consolidation continues and markets across the region grow against a backdrop of rising wealth and a burgeoning middle class, we are starting to see Latin American players with the scale, expertise and ambition to look beyond their national borders for opportunities elsewhere in the region and beyond. In February 2015 Brazil’s Grupo BTG Pactual SA – the largest independent investment bank in Latin America – completed its acquisition of Bermuda-based reinsurer Ariel Re Holdings Ltd for $350m in order to expand its presence in the property and casualty industry outside of its local market. This can be seen as part of the company’s effort to broaden potential revenue and business opportunities sources as financial markets in Brazil struggle after three years of sub-par growth.
We should certainly expect more deals of this type. As businesses across all industries expand beyond regional borders and enter new markets overseas, they may likely prefer to manage the new risks they will encounter in partnership with an insurer that can offer a combination of expertise in both home and foreign markets.
The search for growth
The region remains highly attractive to established international players looking for growth opportunities outside their often stagnant domestic markets; there has been double-digit life insurance premium growth in every major Latin American market over the past five years. As a result a number of companies have set up operations or strengthened their capabilities in the region over the last 12 months or so.
In December 2014, Bermuda’s Armour Group Holdings Ltd bought Fidelity National Title de Mexico, the country’s largest title insurer, while in Brazil ACE acquired the insurance business of Itaú Seguros for $630m in a deal which will make the US company the largest commercial p/c insurer in the country. Although there have been no inbound acquisitions completed so far in 2015, this lull in activity is not set to continue.
In March the UK insurer RSA revealed that it had appointed Goldman Sachs to sell its Latin American arm, which is thought to be worth around £500m ($739m). However, analysts have described this operation as an “attractive asset” that would likely generate a lot of interest from potential buyers - meaning the unit could fetch considerably more if a bidding war is sparked.
Routes to market
For those that go down the route of becoming an admitted insurer or reinsurer, there are high barriers of entry in terms of licensing and capital requirements. However, there are alternatives to outright acquisition for that that want to establish a presence in the region. For example, late last year, Zurich paid around $350m for a distribution agreement with Brazil’s Via Varejo for the exclusive sale of extended warranty insurance through its retail network of over 1,000 stores. The deal is expected to generate premium volume of more than $530m in its first year and will make Zurich the market leader in this category of business.
Others companies are using Colombia or Miami as a hub for the region in order to circumvent or delay the high costs of establishing an on-the-ground presence, while Madrid is also emerging as a centre for Latin American business. Another alternative is to utilise the Lloyd’s platform – an increasing number of syndicates are represented locally in Brazil now. Hiscox is one example of a company that has opted to access the region through the Lloyd’s Brazil licence, which is a very efficient way of having people in the market as well as allowing the company to attract business back to London through the reinsurance platform.
This route to market is set to expand as Lloyd’s looks to deliver on its Vision 2025. It recently opened a representative office in Mexico City, and has similar plans for Colombia. All of this is good news for those looking for opportunities in Latin America. Although we expect M&A activity in the region to continue to rise, the speed at which it does so will depend on the extent to which investors consider other alternatives.