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Sompo eyeing more M&A in developed economies to grow overseas income

Following its US$6.3 billion move for U.S. insurer Endurance Specialty Holdings Ltd. in October, Sompo Holdings Inc. plans to conduct even more M&A to up the share of overseas income in its total profits.

Sompo's latest three-year plan, announced in November, aims to increase its adjusted overseas profit to about 27% of total adjusted profit in the fiscal year ending March 2019, up from a 15% target announced in March. Sompo expects to complete its purchase of Endurance by the end of the current fiscal year in March 2017.

"We would like to increase the share of overseas profits in our total profits from 12% to 40% sometime after fiscal year 2020," Yukinori Kuroda, head of investor relations at Sompo, told S&P Global Market Intelligence.

To attain that goal, Sompo needs to expand in developed countries like the U.S., where it can gain profit with a short period of time, he said. Before that happens, however, Sompo will be occupied with integrating Endurance into its operations.

As growth in the Japanese market stalls and shrinks, the big domestic insurers are rushing to find growth elsewhere.

"The three Japanese major nonlife companies will continue to do overseas M&A in developed markets, driven by the saturated domestic P&C market," said Teruki Morinaga, an insurance analyst at Fitch Ratings in Tokyo. "If Sompo succeeds in merging well with Endurance, in two to three years the company is likely to make another M&A move," he said.

Sompo's efforts to catch up with the two other major Japanese nonlife insurers, Tokio Marine Holdings Inc. and MS&AD Insurance Group Holdings Inc., may be tricky, given the difficulties Sompo faces in absorbing Endurance and Canopius Group Ltd., which it bought for ¥99.11 billion in 2013, later renaming it Sompo Canopius AG.

Its rivals have had a head start, with MS&AD forecast to see 27% of its total adjusted profit come from abroad this fiscal year, up from 19% a year earlier. MS&AD bought MS Amlin Plc in the U.K. in 2015.

At Tokio Marine, overseas profit is expected to make up 43% of total adjusted profit this year, up from 37% a year ago. It has also been aggressive in expanding overseas. Since 2008, Tokio Marine has made four significant acquisitions of foreign companies: Three in the U.S., including Houston-based HCC Insurance Holdings in 2015, and one in the U.K.

Sompo is now considering establishing a holding company to manage its subsidiaries in the U.S. and other developed countries. The holding company will function as a platform for its overseas M&A activity. "This is only at the ideas stage," Kuroda said.

Setting up a holding company to manage its overseas assets would allow Sompo to make quicker decisions over M&A or other issues, said Reina Tanaka, a Tokyo-based analyst at S&P Global Ratings. "It will be easier to deal with regulators in those [developed] markets as well," she said.

However, the task ahead to wed the three companies, Sompo, Canopius and Endurance, will be a challenge for the Japanese company.

"Endurance has much bigger business in the U.K., Europe and the U.S., but Canopius has a much bigger business in the Lloyd's market. We have not decided how to reorganize the two companies and may combine their Lloyd's businesses," Kuroda said.

"We are now studying how to manage each business of Canopius and Endurance, and we are debating whether we should manage them by type of insurance or on a regional basis," Kuroda said.

The logical answer may be to have a holding company manage the U.S. and European operations of all three, he added.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.

As of Dec. 19, US$1 was equivalent to ¥116.91.