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Japan's MS&AD could look to US in pursuit of overseas earnings

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Japan's MS&AD could look to US in pursuit of overseas earnings

The U.S. could be an obvious location for MS&AD Insurance Group Holdings Inc. to pursue further nonlife insurance acquisitions, building on its 2015 purchase of London-based Amlin Plc, although the Tokyo-based company is likely to proceed cautiously and could face hurdles along the way, according to observers.

MS&AD has committed to generating half its core profit from overseas business by roughly the mid-2020s, and it has some ground to make up in that time, even after its ¥642 billion acquisition of Amlin — now MS Amlin Plc — in 2015.

"We need an Amlin-sized nonlife insurer to be able to increase our overseas profit to 50% in the near future even after our three recent smaller sized M&As," Masahiro Inoue, MS&AD's manager of investor relations and corporate communication, said in an interview. "We will continue to do M&As when we find good targets."

MS&AD has forecast that 28% of its ¥230 billion total core profit will come from its overseas businesses in the fiscal year to March 31, 2018, up from 16.2% a year earlier. President and CEO Yasuyoshi Karasawa said at an informational meeting in May that MS Amlin will generate about a ¥30 billion core profit in the fiscal year ended March 31, 2018.

"It is not definite, but we hope to have 40% of our core profit coming from overseas business by the [year to] March 31, 2023, and to reach 50% soon after," Inoue said.

The Japanese insurer made or agreed to a number of smaller acquisitions in 2017, including Singapore-based nonlife insurer First Capital Insurance Ltd. and minority stakes in Australia's Challenger Ltd. and Jersey-based ReAssure Jersey One Ltd. The company also already has a significant Asia presence, with more than 20 nonlife companies, many acquired in the 2004 purchase of the Asia general insurance business of U.K.-based Aviva Plc.

But an Amlin-sized deal is likely a prerequisite for generating the core overseas profit needed to meet the 50% goal, and that, analysts say, may mean turning to the U.S. market. Karasawa told the Financial Times in late 2016 that the U.S. would be among the places MS&AD would look to expand overseas earnings.

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Some of MS&AD's competitors have already pursued nonlife M&A in the U.S.: Tokio Marine bought U.S. specialty insurer HCC Insurance Holdings Inc., and Sompo Holdings acquired Endurance Specialty Holdings, another U.S. specialty insurer that is now part of Sompo International.

Even if MS&AD wants to follow the lead of peers, analysts suggest inventory is scarce.

"It's not certain there are always good M&A targets in the U.S. They had not found good targets so far, and that is why they have not done U.S. deals," said Teruki Morinaga, an insurance analyst at Fitch Ratings Japan. "There is only a small number of deals with reasonable prices and well-managed companies."

But U.S. analysts and industry experts say the climate may be right for a potentially successful match.

Following a third quarter of significant natural catastrophes in the U.S., an overseas acquirer might find a buyout opportunity in a smaller, regional U.S. company with an outsized exposure that took a big capital hit, said Cathy Seifert, an insurance equity analyst with CFRA Research. Such a company could look to replenish its capital through a sale, she said in an interview.

"Or, they may have had a concentration of risk and have decided that that doesn't make sense, that they need to diversify and in so doing, put themselves up for sale," Seifert said.

Chicago-based analyst Paul Newsome, a managing director at Sandler O'Neill & Partners, declined to comment on specific companies but said Japanese insurers have typically focused on specialty insurers with strong management teams in place. And if the right target comes along, they will pay, he added.

"The Japanese insurers have often been willing to purchase these insurers at price-to-book value and price-to-earnings multiples that are materially above the stock market's valuation," Newsome said. Sompo bought Endurance for 1.36x book value, Tokio Marine paid 1.9x book value for HCC and MS&AD itself acquired Amlin for twice its book value, according to S&P Global Market Intelligence data.

Even though the implied return is often in the single digits, these transactions may be attractive to Japanese acquirers who face extremely low investment returns in their home country, Newsome noted.

But Japanese companies tend to be cautious, conservative acquirers, said Houlihan Lokey deal adviser Craig Tessimond.

"They look at a lot of things, but they don't often pull the trigger," said Tessimond, a director for Houlihan Lokey's financial institutions coverage and a former investment banker for Nomura Securities, where he advised Japanese insurers.

Whatever strategy it decides to pursue, MS&AD must remain aware of growing U.S. regulatory and legislative concerns over foreign ownership, U.S. observers noted.

Seifert thinks investors should monitor closely the status of Genworth Financial Inc.'s proposed sale to China Oceanwide Holdings Group Co. Ltd., which is receiving intense scrutiny from U.S. regulators.

"Given the somewhat nationalistic tone in Washington these days, I think the issue is still there," Seifert said. "Not to the degree that it is with China, but I do think that it's still there."