Coronavirus spreads China M&A opportunity

February 14 2020 by Nick Ferguson

The coronavirus outbreak is unlikely to hurt Chinese insurers in the long term, but in the near term it is driving share prices down and isolating the country.

Conversely this could create a compelling opportunity for foreign insurers keen to take advantage of China’s newly relaxed ownership rules.

Prudential could be the first beneficiary. It is rumoured to be in talks to buy out Citic’s stake in the two companies’ China joint venture, according to Reuters, after the recent changes have made it easier for foreign insurers to operate without an onshore partner. The deal would require government approval to go ahead, but any investment in the country is likely to be welcomed at the moment as officials struggle to contain the economic effects of the coronavirus outbreak.

Chinese life insurers are among the worst affected, with valuations tumbling during the past month as the extent of the epidemic has grown. China Life has seen more than US$15 billion wiped off its value since mid-January as its shares have fallen 12%, and some others have suffered even more. China Pacific’s share price has dropped 14.4% during the past month, wiping more than US$2 billion off its value.

The high-profile exposure of deficiencies in the public health system may encourage the government to accelerate development of the entire health ecosystem, including private insurance.

While these drops reflect a broader trend in China’s A-share market, the scale of the insurers’ market losses are much bigger. The Shanghai composite index, for example, is only down around 6.5% during the past month.

“A short-term negative impact is inevitable,” according to Steven Chen, principal at Oliver Wyman. “On the one hand, the epidemic will lead to short-term volatility in financial markets, which will have a negative impact on the investment portfolio. On the other hand, the coronavirus (now known as Covid-19) outbreak may result in a slowdown of the overall economy, which would lower the demand for insurance.”

Regulatory approval might be easier to secure, but the short-term volatility caused by the coronavirus may not give Prudential much of an advantage in negotiating a price with Citic.

After all, the long-term fundamentals that attract Prudential and other foreign insurers to China remain in place, and even in the short term insurers’ bottom lines are unlikely to be materially affected by the virus, not least because premiums in China tend to be dominated by savings-type products. Health insurance accounts for less than a quarter of total life insurance.

“Although insurers may face more medical claims, the increase in compensation is not expected to be too high,” said Chen. “Social security insurance will cover most of the medical expenses, and the scope of the commercial insurance is limited to a fixed payment for patients who pass away due to the illness.”

Reinsurers will also pick up a share of the costs, ensuring that the pain is spread thin enough to be readily absorbed.

Insurers may even benefit from the outbreak in the long run if it helps to raise awareness about the value of medical insurance, though this depends on the performance of insurers in responding to claims.

Once the outbreak is under control, Chen argues that insurers should reflect on how the epidemic will change the market going forward.

Indeed, it is not only the public who have become more aware of the value of medical insurance in the wake of the outbreak. The high-profile exposure of deficiencies in the public health system may encourage the government to accelerate development of the entire health ecosystem, including private insurance.

If that happens, the long-term opportunity for foreign insurers will be clear — especially if they can take advantage of current market valuations.

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