Winning AsiaƆs insurance consolidation game

How to find the right role for your company in the coming wave of Asia Pacific insurance mergers.

The collapse of currencies, stock, and property prices during the Asian economic crisis dramatically reduced the solvency of many of the region’s insurance companies. In response, several national regulators have enforced stricter financial requirements, forcing many insurance companies to seek new sources of capital. Now, local insurers are developing a more open attitude to the threat, and opportunity, of mergers and acquisitions.

In addition, several governments – particularly in Southeast Asia – have relaxed laws on financial sector foreign investment. This, coupled with the decline in values, has aroused the interest of multinational insurance companies in expanding their Asian franchises.

These developments have set the stage for the first widespread consolidation of the region’s insurance industry, and Asian insurance companies need to prepare quickly for this coming wave of mergers and acquisitions. They must decide whether they want to shape – or be shaped by – these powerful new currents.

Here, we outline a simple analytical tool to help insurers determine their future roles in the consolidation of the region’s industry, and identify the most important preparatory steps for each of the main consolidation roles.

The benefit equation

The economic benefits of mergers and acquisitions in the insurance industry lie primarily in four areas:

  • The larger merged company achieves higher growth in premium income by selling existing products and serving existing clients through newly acquired sales channels, and through sales of newly acquired products from the partner.  
  • The newly merged company improves its risk/return position because the two portfolios it brings together may complement each other, especially in terms of geography and product, but also for liquidity and capital requirements.  
  • The newly merged company is able to realize economies of scale by cutting duplication and reducing costs.  
  • The pooling of reserves and capital may increase the combined group’s financial strength.

All companies need to ensure they are well positioned to benefit from this consolidation process, as a series of investments and mergers can radically change the dynamics of insurance markets in a matter of months. The recent experience of insurance companies in Australia and Malaysia shows just how quickly consolidation can transform a nation’s insurance industry.

In Australia, five large mergers have increased the gross premium concentration of the top five players from 38% to 53% of the market. Meanwhile, medium-sized players ranking from six to 20 in premium income, have had their share drastically cut from 42% to 29% of the market’s gross income. The share of smaller Australian companies decreased slightly from 20% to 18% and therefore seemed little affected by this first wave of consolidation.

This has reduced the strategic options for the remaining medium-sized and smaller insurers, although many more are likely to take action soon to try to improve their market positions.

Change starting in Southeast Asia

Malaysia has been the first Southeast Asian country to see a dramatic increase in merger activity in the insurance sector. Conglomerates, reassessing their post-crisis portfolios, have been willing sellers. MNI has recently acquired Double Care (Sime-AXA) and United Oriental has acquired Capital Insurance. Fortis has struck up an alliance with Maybank, wherein it will purchase the majority of Maybank’s insurance businesses, while Maybank will sell Fortis’ life and non-life insurance products. The Allianz Group has also entered into a conditional sale and purchase agreement to buy 32% of MBA. This is expected to benefit MBA in terms of financial backing and technical support to underwrite bigger and more sophisticated risks.

insurance consolidation chart

Southeast Asia has a large number of small insurers, many struggling to keep afloat, and merger activity is likely to increase in these markets ahead of other parts of the region. This trend is being fuelled by the dramatic shift in regulators’ attitudes – from opposing consolidation to actively supporting local market mergers. The authorities in Indonesia, Malaysia and the Philippines, for example, have publicly stated their desire for fewer local companies.

First steps in Taiwan, Japan and Korea

By contrast, insurers in Taiwan and Japan appear to feel less urgency to seek new partners. Most can meet recently revised solvency requirements, and foreign competitors have not yet significantly penetrated these markets, although their premium growth rates have been higher than those of domestic insurers.

But this sense of security could prove false – and ultimately fatal. The leading companies in these countries have failed to build substantial international businesses, and have won less overseas business than their western competitors. None of the leading local companies has yet taken the opportunity to make acquisitions in Asia. And their development of new, more efficient channels such as telephone sales and the internet has been slow – most Asian insurance companies remain tied to traditional, expensive, agency networks.

Recently, though, Fubon has entered into a strategic alliance with Citicorp that may provide consolidation impetus to other insurance groups. Citicorp’s asset management and life insurance arm in Taiwan will be merged with Fubon’s units. Citicorp benefits from Fubon’s human resources with fluency in Mandarin, while Fubon benefits from Citicorp’s experience and expertise. This makes them well equipped to explore overseas markets, especially China.

Slowness to consolidate is surprising in these markets, with many takeover targets available at attractive valuations. That said, the planned alliance between Yasuda Fire & Marine, Japan’s second-biggest non-life insurer, and Dai-Ichi Mutual Life, the country’s second biggest life company, could well be a harbinger of further consolidation. Furthermore, there may be a marriage between keiretsu as Mitsui Marine & Fire opts for a merger with Sumitomo Marine & Fire.

In South Korea, with its highly concentrated market, large players are considering how to cooperate with foreign partners. Smaller insurers are likely consolidation targets. Recognizing this, some companies may soon seek partnerships with larger local or foreign companies. Powerful foreign buyers are willing and able to buy into local companies, despite their comparative lack of financial transparency, as Allianz of Germany’s recent acquisition of Korea First Life shows. Korea Life Insurance has been nationalized and is likely to be sold off by the government in three years’ time, after financial and business restructuring.

Planning for consolidation

Consolidation can significantly change the competitive dynamics of a local insurance market within just a few months, so companies must be prepared to respond quickly. As a starting point, insurers need to understand their likely role, based on their relative industry position as measured by size, solvency and combined ratio.

Relative size measured by gross premium income shows whether a company has achieved critical mass in the market. Solvency indicates the sufficiency of its capital relative to the risks assumed. Relative combined ratio is the key to measuring the profitability of the core business.

Using these criteria to assess a company’s relative performance within its market can help it to evaluate its future consolidation role.

Three broad roles exist – consolidator, target and loner. In general, larger players with high solvency relative to the market will have excess capital for acquisitions and therefore tend to act as consolidators. Some multinational insurance companies such as Allianz, AIA and AXA are also well placed consolidators.

Smaller players with low solvency and low combined ratios will typically become attractive targets. But this does not mean they have no choices: targets that have focused on a profitable niche may be able to sustain their independence. On the other hand, generalist targets tend to have a scale disadvantage compared with larger players and will probably need to find a suitable consolidator.  Multinational insurers with subsidiaries in this category may want to consider divestiture or substantial repositioning.

By contrast, smaller players with lower solvency, but consistently high combined ratios, are likely to be loners. They are in danger of being forced out of the market unless a larger consolidator takes them over.

Using this as a starting point, a company can, in conjunction with other factors, develop a coherent consolidation strategy. Such factors include management sophistication, business mix, the amount of inter-group business and access to capital.

Strategy differs by role

Consolidators should seek acquisitions that complement their existing businesses, in terms of both product and geography. They should also try to anticipate moves by other likely consolidators to avoid costly bidding wars – for many acquisitions, over-paying is the most important reason for failure. A realistic assessment of the strategic benefits and synergy potential of a merger helps avoid expensive mistakes. Then, rapid and effective integration is crucial for successful consolidation.

A company that decides it is an acquisition target needs to differentiate itself. It may even proactively approach preferred consolidators as future partners, and could consider restructuring to achieve a better strategic fit with the most likely consolidators.

Generalist targets that wish to avoid acquisitions will have to change their industry position and become either consolidators or focused targets.

However, this may require substantial capital support and some well-managed takeovers of other generalist targets. To become a focused target, the company will need to divest some product lines and concentrate on a few profitable niches. It will need strong, experienced management, as well as time to build up the required internal capabilities.

Even loners are not entirely without choices. But they need to work at transforming themselves into more attractive and valuable targets, since their chances of survival in the consolidating industry are likely to deteriorate rapidly. Making such a transition requires tight management control and a sustained improvement in the company’s operations. Management needs to prioritize the areas where change must be made and then move rapidly and forcefully.

The insurance industry is about to become a major focus for financial sector restructuring in Asia. The solvency/combined ratio matrix, coupled with relative size, is a helpful indicator of the appropriate consolidation role, especially in the more developed regional markets. Careful analysis of an insurer’s current market position – and the ways that role fits the current consolidation game – are crucial factors in ensuring it gains maximum advantage from the unprecedented coming wave of mergers.

Andrew Cainey and Roman Scott are vice presidents in the Singapore office of The Boston Consulting Group.

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