Sizing up the Mergers and Acquisitions in the Insurance Industry

Mergers and Acquisitions (M&A) activities in Asia look promising. However, certain regulations may impede the growth of the insurance industry.

By Chloe Ter

Despite geopolitical uncertainties, insurers have strong appetites for acquisition, said Ram Menon, KPMG’s Global Head of Insurance Deal Advisory. The KPMG survey has also indicated that in 2017, most M&A activities are seen to happen in the Asia Pacific region. The accounting and services firm’s survey also showed that 84% of insurers polled worldwide plan to make between one to three acquisitions, while 94% of these insurers eye at least one divestment.

The emerging markets in Southeast Asia are especially appealing as their economies develop and stabilise. Insurers who wish to explore new business lines and distribution channels will tap on the sizable population in the region. A wider revenue base will allow the insurers to achieve economies of scale and lower cost. However, in a competitive industry with tightening regulations, the increasing cost of compliance erodes insurers’ profitability.

At times, acquisitions may prove to be a faster way to kickstart business in a foreign market. Prudential made its first acquisition in Asia during the year 2013. It acquired Thanachart Life, a wholly-owned life insurance subsidiary of Thanachart Bank and its market share doubled. After which, it entered into a 15-year strategic life insurance partnership with Thanachart Bank. These moves gave Prudential a better chance in competing against AIA, which began operations 70 years ago.

Recent Insurance M&As in ASEAN

Source: The Nation, The Japan Times, Reuters, International Advisor, DealStreetAsia, Insurance Journal (1) (2), The Star (1) (2), PressReader

Southeast Asia is the next M&A hotspot

The number of Asian M&A deals completed in the first quarter of 2017 marks the highest number of deals in recent history, according to Willis Towers Watson’s Quarterly Deal Performance Monitor. Thailand has since emerged as a dominant player in the Southeast Asia region. There was a surge in the nation’s public M&A deals, and total deal volume rose significantly. The number of publicly announced M&A deals in 2016 was thrice of 2015’s. The amount added up to US$10.1 billion.

The establishment of ASEAN Economic Community (AEC) has caused Thai companies to experience a continued increase in their local and cross-border M&As. Since 2015, AEC has been offering opportunities in the form of a huge regional market of US$2.6 trillion and over 622 million people. It has enhanced connectivity in areas like investment and trade within the ASEAN region. It has also amplified economic cooperation amongst neighbouring countries. As more ASEAN nations capitalise on the ease of expansion and partnerships with neighbouring countries, there will be more chances for M&As.

Certain regulatory reforms sway the growth of the insurance industry

Based on CIMB Research’s findings, AIA, Great Eastern and Prudential are dominating players of Malaysia’s insurance industry. As of 2016, foreign companies own a total market share of 81.7%. Malaysia has enforced a cap on foreign ownership limit in hopes of increasing local participation in the industry. Malaysia’s central bank has also instructed foreign-owned insurers to cut their stakes to no more than 70% by the end of June 2018. Large foreign firms such as British life insurer Prudential PLC and Japan’s Tokio Marine Holdings Inc. have plans to reduce their stakes. Sale of existing shares is estimated to raise around US$3 billion. Apart from listing on stock exchanges to sell shares, the move to reduce foreign shareholdings may trigger M&As too. The exact outcome depends on the Malaysians’ willingness to invest a huge sum of money in the remaining six months.

In the long run, strict foreign ownership policies and difficulty in obtaining licenses may hinder the future growth of the insurance industry. These regulatory restrictions will cause the insurance giants to think twice before investing. After all, it is easier to invest in countries with lesser restrictions.

Key role of Bancassurance

Bancassurance, the collaboration between a bank and an insurance company, allows the insurer to sell its products to the bank’s client base. Being arguably profitable for both parties, bancassurance also creates opportunities for greater customer lifecycle management and provides convenience for the bank’s customers. As of 2016, bancassurance accounts for 30-60% of the life insurers’ profits in Asian markets such as Thailand, Indonesia, Singapore, Hong Kong and China.

DBS Bank and Manulife Financial Asia have formed one of the most notable partnerships. The value of this exclusive regional deal is US$1.2billion. It lasts for 15 years and will cover Singapore, Hong Kong, China and Indonesia. Mr Rick Vargo, Managing Director of bancassurance, DBS Bank said “the bancassurance channel is better able to comply with the stricter regulations around consumer protections”. Manulife will be able to tap into DBS’ growing retail, small and medium enterprise customer base of six million. Similarly, DBS will be able to sell a variety of Manulife’s life and health insurance policies via the internet, its branch network, and other mobile banking platforms. DBS is not the only local bank in Singapore to profit from bancassurance. For developing countries like Vietnam, bancassurance will likely become one of the critical channels when the banks are more established.

Will the M&A growth trend persist?

Paul Chen, head of Asia, corporate at DLA Piper, describes the M&A spike in the Asia Pacific insurance industry as a “new development”. He predicts that the trend will persist, in line with the rising number of middle-class consumers buying into insurance products and wealth management services. In addition, technology and innovation are likely to increase the region’s insurance-related M&A activities. For instance, companies could use virtual data rooms to handle and share confidential documentation in a way that meets compliance requirements. This speeds up global and regional transactions, such as M&As.

Insurers may also acquire the insurtech firms which disrupt the industry. Alternatively, there could be acquisitions between the banks and insurers. Acquisitions could go both ways – banks buying part of the insurance portfolio and vice versa. For instance, there are already discussions between Siam Commercial Bank and Hong Kong insurer FWD Group to sell the former’s life insurance arm. The insurance industry is in for changes, and the spotlight is on Southeast Asia.