Insurance deals lead the way for LatAm financial M&A in Q3

M&A deals in the insurance sector led the way during the third quarter as financial reinsurers and brokers accelerated the pace of shopping in Latin America.

The number of deals in the first nine months of 2021 came to 79, equal to the same period in 2020. The pace of deal-making in the financial sector picked up steam around a year ago as economies gradually reopened from COVID lockdowns and cash-plenty lenders took advantage of opportunities in the space.

During the three-month period, 28 deals were announced or completed in the financial sector for an aggregate deal value of above $1 billion. Although deals were slightly up quarter over quarter, they fell 31.7% from the year-ago threshold of 41 transactions.

Of the 28 deals, 12, or 43% of all financial deals during the third quarter, were targeted at companies in the Latin American reinsurance and insurance sector.

In the quarter, Brazil's Alper Consultoria e Corretora de Seguros SA bought Banco C6 SA's reinsurance brokerage unit at $5.6 million. Digital lender C6 was reportedly not deeming its reinsurance service as core, thereby putting it up for sale. It was one of the latest purchases in a series of M&A deals by Alper. The Brazilian firm said earlier this year that it was planning to invest up to 100 million reais by the end of 2021.

Other deals in the insurance segment include Grupo de Servicios y Transacciones SA's purchase of Metlife's Argentine business MetLife Seguros SA.

In the health insurance industry, Brazil's Sul América SA and Hapvida Participações e Investimentos SA vied for health insurance firm HB Saúde S/A. Hapvida's proposal was accepted and it reportedly acquired 59% of assets, whereas Sul America took the rest. According to a report by investment bank BTG Pactual, the purchase brings synergies to Hapvida and justifies a transaction valued at over $125 million.

In a recent report, Fitch Ratings said it expected demand for reinsurance in Latin America to increase during the second half of this year. The agency attributed that rise to uncertainty linked to the pandemic and numerous high-impact weather events that have struck the region.

"There is a very significant interest in insurance in Brazil," Daniel Wainstein, a managing partner with Brazilian boutique M&A firm Seneca Evercore, said in an interview. "Insurance will increasingly become an investment product, and the view is that there is huge potential for growth if the market continues to modernize."

Five out of the eight largest disclosed transactions were carried out in the insurance sector. The expert argues that demand for potential targets in the insurance sector is high, given that there are not as many companies in the insurance technology sector as of yet. "Whenever a firm becomes a potential target in insurance, there is a huge interest."

Brazil continued to dominate the market with eight deals, followed by Chile and Mexico with five and three transactions, respectively. Experts forecast a strong pipeline for the remainder of the year but warn that the flow could be affected next year as Latin America's major economy braces for presidential elections.

"I see a very strong pipeline ahead," Wainstein said. "2022 will be a weaker year compared to this one, so some are rushing to settle deals before Brazil moves into an election year."

But despite political factors, experts believe there are solid fundamentals in the financial space that will continue to drive a busy deal flow. Growing demand for digital banking amid the pandemic has resulted in an increased appeal for technological companies. Traditional banks have increased their purchases of tech to enhance capacity, whereas financial technologies companies have resorted to M&A as a means to rapidly grow their product suite.

Meanwhile, Brazilian digital bank Nu Pagamentos SA acquired Spin Pay payment firm in the quarter, whereas Mexican online lender Konfio Ltd. bought Cobra Online, SA de CV from venture capital firm IGNIA Partners, LLC. Brazilian retail broker unicorn QuintoAndar Serviços Imobiliários Ltda. aqcuired Atta Franchising Ltda., while online investment broker Warren Brasil Gestão e Administração de Recursos Ltda acquired RENASCENÇA Distribuidora de Títulos e Valores Mobiliários Ltda.

"In the past, M&A activity was primarily driven by incumbents or large corporates acquiring smaller start-ups," Carlos de la Vega, a managing partner with Latin American Private Capital Association, or LAVCA, said. However, the past 12 months saw startups acquiring fellow startups, de la Vega added.

Big asset management deal

During the quarter, the largest disclosed deal was Brazilian Patria Investments Ltd.'s acquisition of leading asset manager in Chile Moneda Asset Management SA, a merger worth $445 million. Patria had completed an initial public offering in U.S. markets earlier this year, with net proceeds of above $302 million that would be applied, in part, to acquire companies outside of Brazil.

Combined with Moneda, the new structure would have roughly $26 billion in assets under management, according to a press release from the Chilean firm. "With Patria, we will have the opportunity to expand our cross-selling of products, leveraging a complementary investor base," CEO Alfonso Duval was quoted as saying.

The asset management industry in Brazil has produced several deals in the past. Although no financial M&A deals were recorded in the quarter, digital broker XP Inc. has been one of the most active buyers in the market throughout the year.

"Asset managers are gaining a lot of muscle in Brazil," Seneca Evercore's Wainstein said. The executive expects a greater number of deals down the line in one of the most competitive sub-segments in the Brazilian financial space.