Amid low growth and even lower interest rates in the US and European economies, insurers adopting a mergers and acquisitions (M&A) strategy to grow revenues and tap new technologies are looking overseas, mostly to Asia and in particular to Hong Kong, according to new research from Willis Towers Watson, a leading global advisory, broking and solutions company.
Drawing on input from 200 senior executives in the insurance industry, split equally across the Americas, Asia and EMEA regions, and produced in conjunction with Mergermarket, the report shows that while only 5% of respondents currently generate more than half of their profits outside their home region, 15% expect to do so three years from now.
As insurers become more outward-looking and seek to generate a greater percentage of future profits from overseas, Hong Kong is where many insurance companies are turning to for new opportunities. This is largely driven by mainland China. Of the 21 proposed takeovers of Hong Kong insurers during the past three years to July 2017, nine were led by mainland Chinese companies, according to Thomson Reuters data.
“Hong Kong’s emergence as a hub to capture a flow of savings out of mainland China comes against a backdrop of Beijing’s elevated scrutiny on capital outflows to strengthen the yuan,” said Kevin Angelini, Head of Strategy for the Insurance Consulting and Technology business in Asia Pacific at Willis Towers Watson. Mr Angelini added that interest from mainland China also makes Hong Kong attractive to other overseas buyers. “Not only are mainland Chinese companies acquiring insurers in Hong Kong. In recent years, mainland Chinese individuals are also increasingly buying insurance policies in Hong Kong to gain access to more product options, including the option of buying policies denominated in the US dollar or Hong Kong dollar, which provide a hedge against fluctuations in the yuan,” he said. “This has pushed up the total sales of insurance products in the city, thereby making the city an attractive target for many new investors.”
These features add further value to Hong Kong’s traditional appeal as a well-regulated free market with good profitability, mature insurance customers, abundant cash flow, robust solvency ability, strong management experience, and access to international capital markets. “All of these can help acquirers to integrate resources quicker and better,” said Mr Angelini.
Non-insurers entering market, often with different goals
Private equity business JD Capital in August 2015 agreed to spend HK$10.7 billion (US$1.37 billion) to buy the Hong Kong life insurance business Ageas, which was subsequently renamed to FTLife. In June 2016, mainland Chinese real estate company Fujian Thai Hot Investment agreed to pay HK$10.6 billion to buy the life insurance operations of Dah Sing Financial Holdings.
“The expansion of the insurance business can offer a long-term and low-cost channel to gain access to capital so that buyers can reinvest the premiums to feed their other business — such as real estate — which could yield higher investment returns. That said, a future challenge will be effective Asset-Liability Management (ALM) of the insurance portfolio and potentially also Capital Management,” said Mr Angelini.
He added that while buyers’ traditional goal when making an acquisition is to acquire customers, the approach of mainland Chinese non-insurance buyers is the reverse. “They already have the customers, but they need the financial mechanism to serve them. Buying an existing insurance company will immediately provide the relevant licences, business infrastructure and qualified management staff.”
Acquisitions by tech giants, a trend amid digitalisation
In January 2017, Aviva agreed to sell two-thirds of its Hong Kong life business to Tencent and Hillhouse Capital in a deal designed to set up a new digital insurer. In August 2017, Jack Ma’s Alibaba-backed Yunfeng Financial bought the Asia unit of MassMutual for US$1.7 billion, with ambitions to integrate robo-advisory technology and advanced data analytics into the insurance business.
In Hong Kong, the Insurance Authority (IA) welcomes such companies investing in the sector. In fact, the welcome is such that the IA launched its fast track for digital licences to expedite the process for such technology companies