Sompo widens M&A lens to seek entry to European & US commercial P&C

Sompo Holdings could radically expand its approach to mergers and acquisitions (M&A) beyond “bolt-on” acquisitions as it applies its well-documented $5 billion M&A war chest towards breaking into Europe’s often insular markets or ploughing its way deeper into the US, the group’s top acquisitions leader told Intelligent Insurer.

“We are very flexible: we don’t have to own 100 percent of what we buy,” Nigel Frudd, Sompo’s senior executive vice president and chair of overseas M&A, told Intelligent Insurer.

“We can do joint ventures, we can do minority stakes, we can cut the cake in any way—if it brings what we are looking for.”

Sompo has been seeking the same crucible so many Japanese insurers face as an ageing home market stagnates. But its $5 billion of available funding should be ample to serve the strategic growth goals of “scale and diversification”, group chief executive officer Kengo Sakurada emphasised throughout the group’s November 2021 investor day.

For Frudd, that M&A mandate points to developed markets ahead of emerging ones and, within developed markets, to commercial P&C before retail.

“If the goal is more overseas earnings as soon as possible, then the fast way is to invest in the developed world,” Frudd says. The calculus clearly puts the higher valuations but quicker and safer returns found in developed markets ahead of the potentially lower pricing yet higher risk and volatility found in emerging markets.

No easy way through

Developed markets for Sompo mean “primarily the US and Europe”, but both of those markets are presenting challenges: Europe is insular; the US picked over.

“The EU is a light footprint and we should have more,” Frudd says. But the 27-nation bloc is a “difficult market to break into” with individual quasi-protectionist systems across 27 very individual markets.

“Ownership structures, including union stakes, plus byzantine corporate structures make it difficult,” says Frudd. Sompo’s EU-licensed re/insurer in Luxembourg can only capture so much on passport.

The US market, in turn, looks to be past its peak of M&A activity. “The chessboard has become smaller as the lower mid-caps have been taken over,” Frudd acknowledges.

Sompo might yet catch a cast-off morsel as those deals shake down, he suspects. “There are good assets that will be freed up as recent buyers may move to reorganise their portfolios.

“We are ready to go at a moment’s notice.”

Any opportunistic diversion in an emerging market would likely complement existing national presences rather than fill white spots on any map. Sompo’s current emerging markets presence, chiefly Asia, Brazil and Turkey, largely matches Sompo’s attempts to keep pace with the foreign ventures of key corporate clients in Japan. “We don’t have a big plan to jump into a new country in the developing world,” he says.

A high bar—but a flexible one

An openness to joint ventures (JVs), minority stakes and other deals probably won’t open the doors wide to one and all across Europe and/or North America, Frudd knows. The bar for selection could be set even higher than for garden variety M&A.

“You don’t wish to JV or partner with someone with a rival set of products,” Frudd says. “When seeking a JV partner, you look at someone who wants to expand but doesn’t have the capacities you bring and is comfortable with the shared role.”

That may run above and beyond Frudd’s baseline demands for M&A targets.

Frudd’s global M&A team has reviewed over 45 potential assets over the past six months without being able to tick all the boxes to proceed towards a deal.

Frudd claims a focus on business lines, dislocation and synergies to existing presence. Quality of management requires “meticulous” review, including to prevent deal breakage, talent flight and customer churn during integration. Increasingly, a target’s environmental, social and corporate governance stance has become a deal-breaker.

“We aren’t spreadsheet jockeys,” Frudd says—the group remains mindful of how valuations on developed markets can render a lifetime goodwill drag on earnings to make some acquisitions “very unprofitable”.

“For the right asset, we can absorb the goodwill, but at this moment there are a lot of businesses for sale which just aren’t worth the money,” he adds.

Reinsurance is no substitute

Alternative routes into the major developed markets are not on the cards.

Reinsurance could provide blanket exposure, but the risk-reward profile might not match Sompo’s needs. “Profits are high, but risks are high too,” Frudd says of an industry grappling with emergent risks, chiefly those of climate change.

Sompo is not tempted to build piecemeal via managing general agent (MGA) purchases. “The MGA market is hot in M&A activity, but it has really not been a part of our strategy,” he says.

Nor is Lloyd’s the Sompo ticket to European or other developed world exposure. Frudd cites cost base in justifying Sompo’s decision to pull out of Lloyd’s, a position it had once needed as a blanket licence to the world.

Meet Nigel Frudd

A polymath in the insurance industry, the Yorkshire, UK, native brought 13 years in corporate finance, law, forensic accounting, tax consultancy and more before his first brief stay in the insurance industry, at Scottish Amicable and Prudential.

Frudd was at the table in 2013 when Sompo made an early move to go global with the purchase of Lloyd’s Name Canopius. That relationship grew to the point where Frudd could spearhead the 2017 deal by which Sompo exploded on to the global stage: the $6.3 billion purchase of Endurance.

Endurance, refashioned as Sompo International, is the vehicle through which Sompo now designs its global presence, including via the late 2020 deal for Diversified Crop Insurance Services (DCIS) to become AgriSompo.

Signalling the hoped-for role of M&A in Sompo growth, Frudd holds the title of chairman of overseas M&A, a direct tie to group chief executive officer Sakurada.

“The global M&A team is innovative and quick-moving, and we don’t waste people’s time,” says Frudd. The 2020 deal that turned into AgriSompo showed that Sompo can do deals in short order, in the depths of lockdown, and without investment bankers at the table.