Philippines insurers set for M&A wave: Fitch

The US ratings agency also expects premium growth to remain robust but warns about the country's high catastrophe risks.

The Philippines’ insurance industry is set for a wave of consolidation over the next few years as recently introduced capital rules continue to bite.

According to Fitch Ratings, insurers in the country – highly prone to natural disasters – face a challenging environment in the next few years with the market saturated and competitive.

The Philippines Department of Finance (DOF) imposed higher capital requirements on both life and non-life insurers in June 2012.

These minimum capital requirements require insurance companies to comply if they are to continue operating in the Philippines, said Jeffrey Liew, Fitch’s head of Asia Pacific insurance ratings.

This has already caused “many insurers to struggle, with a total of 32 companies placed in conservatorship and liquidation by end-2012”, Liew told FinanceAsia.

As such, Fitch expects the Philippines’ insurance industry – especially the insurers that fail to meet the minimum capital requirements – to be hit by a wave of merger and acquisition activity in upcoming years.

"Robust macroeconomic conditions and potential premium growth are also some of the favourable factors that would spur foreign investors to embark upon M&A activity," Liew added.

However, the US ratings agency views the “tightened regulation in a positive light, as it weeds out under-capitalised players and should reduce industry overcrowding while the Philippines prepares for the Asean Economic Community framework in 2015”, analysts wrote in the report.

Meanwhile, the growth of premiums should also be robust.

Insurance premiums totalled P177.2 billion ($3.9 billion) in the nine months to the end of the third quarter 2013, edging past the P174.9 billion for full-year 2012, according to Insurance Commission data.

Fitch argues that the number of factors – such as low penetration rates, loosened bancassurance rules and increasing urbanisation – suggest the increase in premiums will continue.

Foreign firms, such as Canada’s Sun Life Assurance Company, the UK’s Prudential and Hong Kong’s AIA, dominate the country’s life sector. Local insurers, meanwhile, make up most of the non-life market share, with Malayan Insurance holding the top position.

Insurance penetration in the country remains low, due to a lack of understanding of the benefits of insurance, coupled with affordability issues for the lower income population, the agency said.

Swiss re estimates the insurance penetration rate in the Philippines stood at 1.4% as of March 2013, compared with 4.8% in Malaysia and 5.02% in Thailand.

Ultimately, the most significant hazard facing Filipino insurers is catastrophe risk.

The Philippines, which ranks third for the number of natural disasters according to the Office of Foreign Disaster Assistance and the Centre for Research on the Epidemiology of Disasters, is under almost constant threat to natural devastation.

It is hit by an average of 20 typhoons a year and its location in the “Pacific Rim of Fire” leaves the country venerable to severe earthquakes and volcanic eruptions.

Fitch expects the non-life sector will report a net loss in the fourth quarter due to claims for Typhoon Haiyan – known locally as Yolanda – which hit the country on November 8 and remains the most powerful storm to ever hit land in any part of the world.

Yet Haiyan will not likely cripple the overall industry growth, given “stellar premium growth posted by the life sector in the first nine months of 2013 and the Philippines’ very low penetration rate”, Fitch said.

Nevertheless, storms such as Haiyan underline the importance for companies, insurers and governments to strengthen their risk management structure, the agency argues, warning that catastrophe perils could hinder non-life sector premium growth if it is not addressed.

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