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FOCUS: Insurers Eye Emerging-Mkt Buys, Avoid Large M&A Deals

Aug 19, 2008 Mergers and Acquisitions

PARIS (Dow Jones)–Europe’s insurers remain in the hunt for small to midsize
acquisitions, with the action likely to center on promising emerging markets in
the East and South, while larger, balance-sheet-straining deals in mature markets
will likely have to wait as companies tread cautiously in the face of the global
credit crisis.

Insurance heavyweights such as Axa SA (AXA), Assicurazioni Generali SpA (G.MI)
and Zurich Financial Services AG (ZURN.VX) are seeking buying opportunities in
emerging markets to offset a slowdown in premium growth in their domestic
markets.

That means the M&A focus for the sector will likely take place in countries like
Turkey, Ukraine and Slovenia. That could also mean bad news for European banks
which, weakened by the credit crunch, are looking to unload their larger
insurance operations in Western Europe to improve their balance sheets and exit
non-core businesses.

Indeed, two blue-chip banks, the Royal Bank of Scotland Group PLC (RBS.LN) of the
U.K. and Spain’s Banco Santander SA (STD), are struggling to find buyers for
their insurance operations. Potential candidates, including Allianz SA (AZ) of
Germany, Axa and Zurich Financial, have either not actively participated in the
bidding process or offered prices that were below the sellers’ expectations.

“Western European banks are offloading assets in mature, slow-growing markets,
but insurance companies are correctly focused on building their market share in
fast-growing, higher-margin areas,” said James Beadle, chief investment
strategist at Pilgrim Asset Management in Moscow.

The insurers’ cautious approach is a necessity despite posting resilient
first-half earnings, ratings agency Moody’s said Tuesday in a sector note.

“As major investors in global markets, Europe’s insurers are not immune to
volatility or, of more concern, negative trends in these markets,” it said.

There are two reasons for the insurers’ prudence, a senior investment banker
said: “First, there is the fact that insurers globally remain nervous about their
share price. Proportionally, they suffered more than banks … With the exception
of American International Group (AIG), there was less bad news to digest, but
still the share prices came under pressure.”

“Secondly, they’re very conscious about their balance sheets. They don’t want to
destroy their balance sheets with rumors of maybe having to do a rights issue to
finance a large acquisition,” the investment banker said.

The chief executive of France’s Axa, Europe’s second-largest insurer by market
value, acknowledged that even as several banks took the strategic decision to
divest their insurance division, prices remain high.

“We still see people paying prices of yesterday for the assets of tomorrow,”
Henri de Castries recently said. Axa was one of the candidates to buy half of the
insurance operations of Spain’s Banco de Sabadell SA (SAB.MC), but was outbid by
Zurich Financial, which paid EUR900 million.

Zurich’s acquisition came one day after the Swiss company said it didn’t pursue
talks with RBS to buy the Scottish bank’s insurance arm, citing the high price
tag, the same reason for which Generali decided not to bid.

“Many people say that because of the bonuses in the City, a lot of very
fashionable cars are going to be for sale in the next six months. If you have the
money, why would you jump for the first available? The best bargains are not
going to be first ones,” de Castries said.

Michel Tilmant, CEO of ING Groep NV (ING), also hinted that his company would
avoid large transactions: “Given the current circumstances today, our tendency is
clearly to keep a further drive and not to stretch ourselves by making new
acquisitions, even ‘filling’ acquisitions.”

“Our strategic discipline has not changed. So we basically continue to put
priority on the organic growth,” Tilmant said.

So rather than paying up to an estimated GBP4 billion for RBS insurance and
risking the need of a capital increase, insurers such Axa will pursue smaller
buys in markets with high potential such as Turkey, where an underinsured and
young population provides the insurers with growth opportunities. The French
insurer is among several candidates to buy Yapi Kredi Sigorta, the insurance arm
of Turkish bank Yapi Kredi (YKSGR.IS), whose sale is expected to be finalized in
the following weeks and which could fetch up to EUR800 million.

In Slovenia, which successfully opened its borders to foreign investors since it
gained independence in 1991, one of the country’s largest insurers, Adriatic
Slovenica, is expected to be sold soon. Austrian insurer Uniqa Versicherungen AG
(UQA.VI) reportedly bid EUR280 million for Slovenia’s third-largest insurer.

“The expansion into the newer markets of Eastern Europe makes clear sense,” said
Pilgrim Asset Management’s Beadle.

The upcoming deals are in line with recent transactions such as CNP Assurances
(120228.FR) paying EUR145 million for a 51% stake in the insurance business of
Greek bank Marfin Popular Bank (CPB.CP), and Groupama buying a 35% stake in
Tunisia’s Star for EUR70 million.

In the near future, some investment bankers single out Ukraine as one of the
markets with most potential for further consolidation opportunities.

“Everything is for sale in the Ukrainian market,” another investment banker said.

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Technorati Tags: Agency Moody, Assicurazioni Generali, Assicurazioni Generali Spa, Axa Assicurazioni, Banco Santander, Chief Investment Strategist, Credit Crisis, Credit Crunch, Global Credit, Insurance Operations, James Beadle, Mature Markets, Negative Trends, Royal Bank Of Scotland, Royal Bank Of Scotland Group, Royal Bank Of Scotland Group Plc, Scotland Group Plc, Western European Banks, Zurich Financial Services, Zurn

Tags: Agency Moody, Assicurazioni Generali, Assicurazioni Generali Spa, Axa Assicurazioni, Banco Santander, Chief Investment Strategist, Credit Crisis, Credit Crunch, Global Credit, Insurance Operations, James Beadle, Mature Markets, Negative Trends, Royal Bank Of Scotland, Royal Bank Of Scotland Group, Royal Bank Of Scotland Group Plc, Scotland Group Plc, Western European Banks, Zurich Financial Services, Zurn