Japan’s Cash-Flush Insurers to Keep Paying Hefty Prices for Overseas M&As

By and Thomas Wilson | October 7, 2016

Japan’s cashed-up insurers are likely to keep paying hefty premiums for overseas assets as they seek to spur growth and overcome negative interest rates, fewer lucrative investment options and a fast-maturing market at home.

According to Thomson Reuters data, last year Japanese insurers paid a premium of 27.4 percent on average over their target’s stock price one week ahead of the announced M&A deals. Chinese insurers paid an average 14.2 percent premium while U.S. insurers paid 9.5 percent.

In the latest mega-deal announced by a Japanese insurer, Sompo Holdings Inc. agreed to buy U.S. property and casualty insurer Endurance Specialty Holdings Ltd. for $6.3 billion.

“The headline consideration paid [by Japanese insurers] as a multiple of book value has been high by European and U.S. standards – but one has to weigh that against the low/zero interest and negative inflation environment in the Japanese domestic market,” said Anna Tipping, a Singapore-based partner at Norton Rose Fulbright.

“The Japanese insurers don’t have to chase a 15-20 percent return on equity, a much lower return is attractive and acceptable,” she said.

Sompo is paying a premium of 40.3 percent against Endurance Specialty’s average stock price since July – in line with the sharply higher premiums paid by its peers in the recent past, due to few overseas targets available, bankers said.

“For Japanese companies, because the necessity for global diversification is strong, a little bit expensive purchase is often justified,” said Teruki Morinaga, director for the insurance sector at Fitch Ratings in Tokyo.

“The price is not the primary topic for us. Whether the integration will be successful or not that’s a very important factor we need to monitor going forward.”

Sompo’s deal is the second-largest ever by a Japanese insurer, after Tokio Marine Holdings Inc’s $7.5 billion purchase of U.S. insurer HCC Insurance Holdings Inc. last year. Tokio Marine paid a premium of 35.8 percent.

Dai-ichi Life Holdings, Japan’s second-largest private-sector life insurer, with about 50 trillion yen ($493.8 billion) in assets, is considering more overseas acquisitions, including “large-scale deals,” its president told Reuters.

Chinese and Japanese companies were showing willingness to bid up prices and pay a significant premium over book for a U.S. target that could help establish or significantly expand their market presence, Deloitte said in a report this year.

Many of the potential buyers from Japan have been encouraged by the government to put capital to work outside the country, Deloitte said, adding these insurers are generally patient and willing to balance “the risk of not-as-robust” short-term financial returns against longer-term gains.

In the near-term, the outbound push is expected to improve the return on equity of Japanese insurers, which is on average less than 10 percent and lower compared to U.S. and European rivals, analysts said.

“The targets and shareholder returns companies have are increasing as a result of M&A. Total shareholder returns for all insurance companies are increasing, so that’s a positive,” said Koichi Niwa, an insurance analyst at SMBC Nikko Securities.

(Additional reporting by Taiga Uranaka in Tokyo and Saeed Azhar in Singapore; editing by Anshuman Daga and Raju Gopalakrishnan)


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