How the Asia-Pacific region bucks the global insurance M&A trend

The volume of M&A worldwide in 2013 fell 21% to 320 completed transactions, compared to 403 in 2012, writes Clyde & Co Singapore partner Ian Stewart.

However, the Asia-Pacific region saw a 7% increase to 62 from 58 in the previous year. More significantly, its percentage share of global deal activity by region has been steadily moving upwards since the second half of 2011 – where it sat at just 9% – to 22% at the end of 2013. But just what is driving this increase, and is it sustainable?

Search for growth

In a region steeped in economic and geographical diversity, trends are not always easy to pinpoint. However, there are some common activity drivers across a number of markets. Some companies are being forced into transactional activity to alleviate financial pressure, often as part of the fallout from the global financial crisis, such as ING’s sale of operations in Hong Kong, Korea and elsewhere. Others are being driven by the search for growth.

With persistent soft pricing evident in many locations around the world and opportunities in mature insurance markets difficult to come by, diversification through acquisition into new sectors or distribution channels has attracted a range of players to the Asia-Pacific region. Increasing levels of GDP and improving insurance penetration rates are delivering premium growth across the region, benefiting both domestic and international insurers.

Indeed, over the past 18 months deal-making in the region has been primarily led by Japan, with the majority of deals being outbound investments as domestic insurers explore opportunities beyond the local market. Notable acquisitions in the second half of 2013 included the acquisition of two Indonesia targets: PT Panin Life and Avrist Assurance PT by, respectively, Japan’s Dai-ichi Life Insurance Co Ltd. and Meiji Yasuda Life Insurance Co.

However, there has been activity across the region with Indonesia, South Korea, Malaysia, Taiwan, and Hong Kong all witnessing a range of domestic and cross-border transactions. In addition, China and India both saw a number of deals, although the level of activity does not reflect the size of opportunity that each market represents. While interest in the region remains keen, a number of challenges continue to apply a handbrake to M&A activity. In particular, valuation as a potential roadblock, with sellers pricing aggressively based on the future growth potential of the industry in the region. Activity is also often stymied by difficulties around finding the right targets and limitations on investments in many markets.    

Regulatory drivers

These difficulties are beginning to be addressed, with regulatory reforms underway which will prove to be another key driver of transaction activity. Regulators in many markets are looking at the actions of the authorities to strengthen insurer solvency in Europe and the US, and are taking similar steps in this direction. The desire is to build businesses that understand the risks they are writing, hold the appropriate levels of capital and have strong balance sheets.

A number of insurance regulators across the Asia Pacific region have expressed the view that there are too many participants and have either indicated that new licences will not be issued, or at the very least, new entrants will be encouraged to enter local markets through acquisition rather than new start-ups.  Certainly, an increasing number of new players in the region have formed the view that, notwithstanding pricing and other transaction hurdles, acquisition is the preferred market entry method. For example, the Indonesian government took steps in the last year to tighten up regulation significantly, with new rules including a 250% increase in capital requirements for insurers by the end of 2014. Meanwhile, the regulator in Thailand has relaxed foreign ownership rules and put in place risk-based capital benchmarks to increase transparency and bolster capital strength. It is also planning to amend Thailand’s insurance licensing rules to streamline the merger process and facilitate consolidation. While the specifics of regulatory developments may be local to each country, and the evaluation process for each new market entrant will depend on individual circumstances, the overall trend to fewer, stronger insurers will undoubtedly lead to continued market consolidation in many places.

Bright future

Looking ahead, in addition to Japan, other developed economies such as Hong Kong and South Korea will likely continue to explore growth and profit opportunities in emerging markets such as Malaysia and, in particular, Indonesia. Premiums in the country have been increasing 11% year-on-year – five times the growth rate of Europe or the US – and over the past 18 months the number of deals involving overseas insurers entering the market has increased, with more deals expected. Thailand is also set to take off, with current predictions suggesting growth rates of more than 10% over the next 10 years – this has led a number of international insurers to flag up Thailand as a prime target for M&A activity. China too may also look at opening up other key areas of the market, and changes around pensions, retirement products, tax incentives and health insurance could allow foreign insurers to leverage their knowledge and expertise, ultimately paving the way for more transaction activity. It is expected to be another stand-out market in the region in 2014, as we should see foreign insurers continue to increase the breadth and depth of their presence in the country.

Looking at these developments and the increasingly broad range of opportunities across the region, the future is bright for M&A activity in the Asia-Pacific region.