15 April 2014
- M&A mid-cap deals expected to increase in China
- Reverse Chinese deal flows into mature markets predicted resulting from drivers including the Asset Quality Review
- Allow control of two insurers selling similar types of insurance products after M&A
- Allow investor to use loans to finance M&A (up to 50% of the invested amount)
- Relax the minimal 3-year investment period rule (subject to CIRC case by case approval)
In response to China’s decision to relax mergers and acquisitions rules for the insurance industry, KPMG predicts a focus on domestic consolidation and rationalisation within the market.
Joan Wong, Transaction Services Partner, KPMG China, explains: “Strong underlying fundamentals will continue to attract interest in China, particularly as the developing regulatory environment opens up the market. Many global insurers already have a wholly-owned business, joint venture or direct minority investment in the country, so the relaxation of M&A rules will now enable them to grow through acquisition via their local interests, particularly in the mid-cap segment, as the new rules allow common control of two insurers selling similar products.”
“Also we expect an increased focus on domestic consolidation and rationalisation of existing ownership structures. This will be driven by both the regulator, who has made it clear that it wants to encourage more relevant ownership, and the market itself. A number of companies in the market have been struggling for some time and are either seeking additional partners or a capital injection. This will be made easier under these new rules, including the ability to use external debt to fund acquisitions - up to a limit of 50% of the overall price and subject to approval from CIRC, the Chinese regulator.”
Tony Compton, Head of Insurance Consulting at KPMG China adds: “There is a real opportunity for insurers to capitalise on ongoing sector development including strongly emerging direct distribution through consumer digitisation, deregulation in motor insurance and advances in data availability and integrity services.“
As well as increasing M&A activity in China, KPMG also predicts a reversal in recent deal flows and expects more Chinese inbound investment to come to mature markets.
Wong comments: “We anticipate greater investment from Chinese and other investors, who are seeking to capitalise on opportunities created by current economic conditions. Specific initiatives like the Asset Quality Review for the banking sector will result in more rigorous assessment of whether insurance businesses are considered core, or could be sold and may lead to investment opportunities.
“These developments are an indicator of a much broader trend we are seeing in the global market. In the coming year, we also expect significant interest in countries in Africa, Latin America and the Middle East, prompting a rapid increase in M&A and distribution related transactions.”
However, Wong added a note of caution for foreign insurers seeking to expand in China and other high growth markets. “Whilst the opportunities are significant there are a number of key challenges to overcome including complex regulatory hurdles, disparity in value, fit with local partners and the need to operate flexibly in a rapidly evolving market.”
“Firms must take note of these complexities, for instance, it is not uncommon for sellers to underestimate the level of due diligence buyers will want to conduct and the extended nature of the sales process,” Wong concludes.
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