Trends in insurance M&A - and FinTech demystified

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Joleen Hampton
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1 Trends in insurance M&A - and FinTech demystified 24 th Annual Insurance Issues Conference Monday, November 30, 2015

2 Why undertake M&A? Fundamentally, one side of the coin to the question: do I build or do I buy?, once the strategic decision has been made to 1 Enter a new geographic market 2 Provide a new product and service 3 Access a new distribution channel to reach customers 4 Equip operations with new tools 5 Capture new customers 1

, once the strategic decision has been made to 1 Enter a new geographic market 2

3 Why undertake M&A? Alternatively, it can be seen as defensive to 1 Protect market position 2 Prevent challengers from offering products or services 3 Restrict access to distribution channels to reach customers 4 Avoid others from equipping their operations with tools 5 Prevent others from capturing customers 2

Prevent challengers from offering products or services 3 Restrict access to

4 Why undertake M&A? Or, an opportunity for the deployment of capital 1 To enhance investment returns 2 To take advantage of arbitrage opportunities 3 To consolidate a market and create challengers to large incumbents 3

5 What about divestitures? For every buyer, there is a seller 1 Facing the reality of suboptimal performance or being stuck in the mud 2 Managing (regulatory) capital 3 Passing on the reins of ownership 4 Encumbered by regulation and compliance costs 5 Needing to fund a new/growing venture 6 Simply taking advantage of peak pricing 4

or being stuck in the mud 2 Managing (regulatory) capital 3 Passing on the reins

6 Divorce is good for business Sell Side Sell side share price performance post deal On sell side, announcement of a separation results in a share price decrease of c.3% 1 year after separation however, these organisations have seen a c.12% increase in share price. Buy Side Separated organisation share price performance post deal The share price of the separated organisation tends to fall by c.2% immediately after IPO However, 1 year after separation the organization benefits from c.13% increase in share price. 5

7 The Global Perspective Sustained number of transactions in insurance FY10 FY11 FY12 FY13 FY14 YTD-Aug-15 Source: KPMG analysis 6

271 254 251 313 211 150 100 50 0 FY10 FY11

8 The Canadian Perspective Sustained number of transactions in insurance Q1-13 Q2-13 Q3-13 Q4-13 Q1-14 Q2-14 Q3-14 Q4-14 Q1-15 Q2-15 Q3-15 Includes as targets: Underwriters Brokers/MGAs Based on information extracted from KPMG s Financial Services M&A Digest January 2013 to August 2015 Insurance services: loss adjustors / claims management Employee / HR benefit distributors and servicers 7

Underwriters Brokers/MGAs Based on information extracted from KPMG s Financial Services M&A Digest January

9 Notable transactions Desjardins Group acquires State Farm Canada CPPIB acquires Wilton Re 2014 Manulife acquires Standard Life Canada Lussier Insurance acquires Dale Parizeau Morris McKenzie 2014 Sun Life acquires Ryan Labs Intact Financial acquires Canadian Direct Insurance 2015 Q1 Q2 Q3 Q4 Q1 Q AJ Gallagher acquires Noraxis Wilton Re acquires Transamerica Life Canada Co-operators acquires Premier Group PSP acquires AmWYNS Group Sun Life acquires Bentall Kennedy 8

acquires Canadian Direct Insurance 2015 Q1 Q2 Q3 Q4 Q1 Q2 2014 2014 2015 AJ Gallagher acquires Noraxis Wilton Re acquires

10 Profile of buyer remains concentrated 5% Private Equity/ pension plan 37% Underwriter 10% Service Provider 48% Distributor Underwriters: Fairfax Holdings, mostly overseas Intact Financial Distributors: Hub International Arthur J. Gallagher Private equity/pension plan: Canada Pension Plan Investment Board PSP Investment Board Based on information extracted from KPMG s Financial Services M&A Digest January 2014 to August 2015 but non-traditional buyer profiles are emerging 9

Gallagher Private equity/pension plan: Canada Pension Plan Investment Board PSP Investment Board Based on information

11 Profile of targets remains concentrated Underwriters: 67% cross-border Continued consolidation in Canada State Farm Canada Standard Life Canada Metro General Insurance Transamerica Life Canada Canadian Direct Insurance Asset management: Focus on the US 4% Asset Management 13% Service Provider Based on information extracted from KPMG s Financial Services M&A Digest January 2014 to August 2015 heavily focused on distribution 26% Underwriter 57% Distributor 10

management: Focus on the US 4% Asset Management 13% Service Provider Based on information extracted from KPMG s

12 Matches made in heaven? Profile of buyers Profile of targets 37% Underwriter 5% Private Equity/ pension plan Distributor to distributor not necessarily the norm Underwriters beefing up distribution 10% Service Provider Private equity/pension plan seizing opportunities in underwriting and distribution Asset managers attractive to underwriters Buyers and targets are mostly traditional 48% Distributor Transaction structures also remain traditional buy/sell 4% Asset Management 13% Service Provider 26% Underwriter 57% Distributor 11

norm Underwriters beefing up distribution 10% Service Provider Private equity/pension plan seizing opportunities in underwriting and

13 Significant transaction observations Valuation remain solid TAX Sustainability of revenue Predictability of cost base Tax matters Separation and integration 12

14 Drivers and catalysts of Canadian M&A activity Succession planning Investment capital to be deployed Suboptimal market positioning and/or profitability P&C demutualization rules Wealth management Yet, alliances and partnerships should not be discounted as future means of achieving the traditional goals of M&A 13

profitability P&C demutualization rules Wealth management Yet, alliances and

15 What is a/the future of [Canadian] insurance? 14

16 The current view 26% 74% Lack internal core skills to drive innovation 15

17 What about Insurance FinTech? Applying to the sector of Insurance The fusion of Financial Technology 16

18 Capital raising in Global Insurance Fintech 3,000 2,500 2,000 1, , , FY11 FY12 FY13 FY14 YTD-Sept Source: CBInsights 17

60 50 40 1,000 500-23 685 130 336 214 FY11 FY12

19 Unicorns and Narwhals in Fintech Unicorns and narwhals at Q2-15 global Lending Payments Real estate Investing Insurance Other Source: Finovate 18

5 0 24 22 20 7 5 5 Lending Payments Real

20 FinTech in the insurance world today Disaggregation Connections Disaggregated distribution Sharing economy Smarter, cheaper sensors Wearables Self-driving cars Third party capital Internet-of- Things Standard platforms Source: World Economic Forum The Future of Financial Services, June

Wearables Self-driving cars Third party capital Internet-of- Things

21 Our recommendation Responses Governance Capability Build innovation capabilities e.g. Agile Procurement Accessing a broader range of external partners/providers Business Model New products and business model opportunities FinTech customers Selling to or through FinTech companies Venturing Equity stakes in high growth businesses and acquisitions Build Procure Partner Sell to / through Acquire Internal Partnerships External 20

22 The Final Word Questions? 21

23 Georges Pigeon Partner, Deal Advisory Tim Prince Partner, Deal Advisory David Downie Partner, Corporate Tax

24 2015 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.

ASSET MANAGER DEALS:

//////////////////////////////////////////////////////////////// ASSET MANAGER DEALS: Trends in Asset Manager M&A Five-Year Empirical Deal Study Christopher S. Harrison Schulte Roth & Zabel LLP Negotiating