Friday, March 23, 2018

Targeting Asian growth

The number of insurance M&A deals has dropped from the peak of 2015, but companies are now focused on bigger deals and, increasingly, international insurers are looking to under-invested emerging Asian markets as a solution to their problems at home.

Stricter regulation, low growth and increased competition have taken their toll, says Willis Towers Watson in its latest M&A survey, published with Mergermarket. “Now is the time to come out fighting,” it concludes, arguing that a robust capital optimisation plan and clear M&A strategy can help to increase efficiencies and build growth.

The most popular capital optimisation strategy reported by insurers, it says, has been to change strategic asset allocation to increase holdings of alternative assets.

“Insurers face significant challenges in achieving the returns that they were once used to,” says Joseph Milicia, property and casualty M&A practice leader for the Americas at Willis Towers Watson.

This reality is driving M&A, but not simply as a means to capture the underlying growth potential of under-penetrated insurance markets in Asia and other emerging economies.

“Insurers from countries with particularly low growth are looking to do deals overseas to have better access to those investment markets because of the challenges in achieving competitive returns on their equity via local investments,” says Milicia.

At the same time, Chinese insurers look at the US and are attracted by the relatively more stable investment markets, while Japanese insurers see higher long-term growth rates. The bottom line is that insurers around the world are looking at geographic diversification as an attractive strategy and that will continue to fuel M&A.

According to respondents, 40% say that emerging Asia will be a focus of M&A during the next three years. However, there are still challenges for international insurers looking to expand their footprint into the region’s two biggest markets, China and India.

“Both countries have very strong incumbents, China Life and Life Insurance Corporation of India, because they both used to be state monopolies,” says Milicia. “It’s been some time since those markets liberalised, but the monopolies created players who built scale when there were no competitors and they are giants. There is still a lot of room for foreign companies to play in those markets but it is going to be a fine line between success and failure.”

On the subject of capital optimisation, there is clearly still some confusion in Asia. As in the world of banking, there is a persistent idea that regulatory capital is money that is somehow diverted from the business. As the chief investment officer at one life insurance provider in Malaysia says in the report: “The current economic capital standards put a lot of focus on setting aside capital. Differences in market regulations further increase the need to put aside large capital amounts.”

This is not really true. In effect, regulatory capital is just another term for equity — or capital that does not have to be repaid. There is certainly a debate to be had about whether insurers have as much need for liquidity as banks, but it is misleading to suggest that regulatory capital is “set aside”. It is not. When an insurer raises capital through the sale of shares, it counts as regulatory capital but the money is not locked away. It is completely free to be deployed in the business and, most important, does not need to be repaid in a crisis.

As former Bank of England policymaker David Miles put it several years ago when talking about similar language used by bankers, “capital requirements are often described as if extra equity financing means less money for lending. This is pretty much the opposite of the truth. Equity is a form of financing; other things equal, a bank that raises more equity has more money to lend — not less.”

Even so, one thing is clear: growth remains a key focus for insurers of all stripes, both in terms of the underlying business and in the investment portfolio. And Asia remains a key source for this in both books. The trick is accessing it.


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