What is driving Asian money into re/insurance—and how it will change the industry
Although there are signs that China’s economic growth is slowing, it remains robust compared with that of almost any other economy in the world and this is pushing along the development of its re/insurance markets, making them ever more attractive to foreign companies seeking growth.
China’s total gross written premium amounted to roughly $391 billion in 2016, with total insured assets of around $2.15 trillion, according to Aon’s Asia Market Review 2017.
And its growth rate is exceptional: in the third quarter of 2016, new premium income was growing at a rate of 32 percent year on year, mainly driven by a boom in the health and medical sector, with the health insurance market experiencing a growth rate in excess of 86 percent.
In the past three years, the size of the Chinese insurance market has surpassed each of the German, French and UK markets, according to the China Insurance Regulatory Commission (CIRC).
Speaking at the 2016 China Insurance Development Conference in Beijing, CIRC highlighted that China’s ranking had skipped from sixth to third place in this period, and said that it could overtake Japan by the end of 2016.
In terms of reinsurance markets, China is projected to be the largest by 2022, according to Willis Towers Watson’s Asia insurance market review for 2016.
The drivers behind the growth, as mentioned in the Willis report, included the implementation of China’s Risk Orientated Solvency System (C-ROSS), continuous growth of the direct insurance market and the State Council’s 2014 10-point strategy.
Prior to 2016, China Re and Taiping Re were the only domestic reinsurers in China. The number of local reinsurers doubled in 2016 as PICC Re and Qianhai Re were granted approval from the CIRC.
The Willis report suggests that at least three other applicants could form local reinsurance companies, with a further 20 companies planning to apply in the coming years.
Michael Guo, managing director of Hong Kong for Boston Consulting Group (BCG) and former Willis Capital Markets & Advisory co-CEO, says that the country is now adopting an aggressive approach to building its reinsurance business.
Guo has worked on a number of cross-border M&A transactions involving China and the US, including Fosun’s acquisition of Meadowbrook, China Minsheng Investment Group’s acquisition of global reinsurer Sirius, China Oceanwide acquiring Genworth Financial for $2.7 billion, and numerous acquisitions in Europe involving Chinese insurers or conglomerates.
There are some important differences between Chinese re/insurers and their peers in Europe or the US, Guo says. One is their typical shareholding structure.
Chinese insurers can be broadly categorised into two ‘buckets’, he says, the first being the large insurance companies such as PICC or China Life.
“These are traditional. They used to be state-owned, then became public. Now they have a very loose shareholding. They are publicly listed companies that very much feel like a normal insurance company,” says Guo.
Guo suggests that big insurers such as PICC and China Life will be unlikely to branch outside China through M&A due to the fact that their domestic markets still offer double-digit growth, despite the economy slowing down.
This trend can be seen in economic research published in January from Munich Re, China: Weaker economic growth–but the insurance market is booming, which shows the growth rate in GDP for 2012–2016 of 7.3 percent forecast to fall in 2017e–2020e to 5.9 percent.
The double-digit growth of 14.3 percent in 2012–2016 is forecast to remain in double digits in 2017e–2020e, although slightly lower at 11.8 percent.
“They are in a very advantaged position. They have the scale benefit, they have the brand, and they attract the talent. They have all the means needed to grow the business in the domestic markets,” Guo says.
These type of insurance companies are owned by Chinese conglomerates, meaning the major shareholders are not from the traditional financial services sector, such as banking or insurance, but rather their core business may be in anything from mining and infrastructure to manufacturing.
Examples of these insurers owned by big conglomerates include the reinsurer Peak Re, owned by Fosun Group, the same conglomerate which acquired Ironshore before Liberty Mutual stepped in and took it on board.
Another example is Anbang Insurance Group, whose shareholders are comprised of diversified conglomerates, which acquired Holland insurer Vivat, and China Oceanwide Group, another big Chinese conglomerate, which acquired Genworth Financials in the US, but also owns another insurance company in China.
One of the biggest airline groups in China, HNA Group, also owns two insurance companies in China.
These insurance companies, or the shareholders, are the real drivers in the global M&A market—both cross-border and domestic M&A, says Guo.
“The shareholders in the second bucket of companies are full of cash. If you look at their core businesses, these are the traditional businesses who have made money in the past 10 to 15 years riding on the extraordinary growth of China, in manufacturing, infrastructure, real estate and mining.”
What is interesting about these insurers, Guo suggests, is that they are not top tier in terms of size like PICC or China Life, but rather mid-tier or small, niche companies that find it is very difficult to grow domestically. And M&A is not always attractive in China, due to its being a highly regulated market.
Having a strong need to deploy capital in the financial services sector to look for more stable and sustainable return, these insurers can only grow organically, which is why they look overseas, says Guo.
Such conglomerate-owned insurers then look to the European and the US markets, which can be more appealing than the Chinese market for a number of reasons.
By contrast to the Chinese market, the US market is typically seen as more sophisticated, more transparent and more of a level playing field.
“As long as you play by the rules and the regulations you’re treated like everyone else,” Guo says, “and that is one of the reasons for them to acquire in the US and Europe where they can acquire an entity, as with Ironshore, and try to bring that business back to China in order to tap domestic market growth.
“Rather than using a domestic entity they can now have the foreign entity with the expertise, experience and capabilities developed in a more mature market, coming back to China either partnering with a local business or through other means to capture the business that is potentially not available by the local entity.”
When growth trumps profits
There can be big differences between China-owned and Western insurers in terms of their approach to managing their businesses—they can have very different priorities.
An October 2016 report from Moody’s, China Credit: Overseas M&A Shift Towards Higher-Value Sectors Set to Continue, suggests that many Chinese entities have relatively limited experience in managing cross-border investments, meaning there is significantly raised execution and financial risks that could prohibit an M&A deal from generating synergies. This, in turn, can negatively affect the acquirers’ credit quality.
Due to these differences in corporate cultures, market focus and productions, Moody’s noted, in many of the more recent cases of Chinese outbound M&As, the acquired companies have continued to be operated by their existing management.
Guo says one of the key differences between Chinese and Western insurers is China’s focus on growth, which it not only takes an aggressive approach towards, but will often make the top priority, overtaking profitability in many instances.
“Chinese insurance companies always put scale up front, as the top priority compared to profitability. They go for scale first, before they become profitable,” he says.
“By contrast, Western insurers, for example in the US and Europe, often see profitability or turning around capital and using it more efficiently as the most important thing.
“You can be a niche player, but you have to be profitable. If you’re too big but making very low margin you’re not going to be welcomed by the capital market and shareholders,” he adds.
The insurance industry in China is highly regulated, so any joint ventures in life insurance cannot exceed 50 percent ownership, for example.
However, Guo suggests that this rule may be relaxed allowing foreign ownership to potentially go up to 100 percent, although no specific rules have yet been posted.
In the past 10 years, Guo says, the collective market share for these foreign insurance companies—including joint ventures—fell by more than 50 percent, and he believes this may fall even lower in the future.
One of the factors behind this, according to Guo, is that many—if not the majority—of these ventures are not working well and this is often largely due to Chinese partners not seeing eye to eye with foreign partners and insurers in terms of how to grow the business.
Guo suggests that in the last 10 years, across the Chinese market and most of the sectors—insurance, banking or manufacturing, for example—there hasn’t been any form of crisis per se.
“People are used to the notion you grow a business as fast as you can to capture the market share and capture the profits. It’s not a game of focusing on your operating expenses or focusing on your capital, but it’s more about growing as much as you can so you will capture the market,” Guo says.
“The market is growing so fast; if you can keep up with the market you’re good. If you don’t grow as fast as the market, potentially you’re going to be marginalised.”
This conflict of interest can have negative consequences when Chinese and Western businesses come together, and in the past three to four years, Guo suggests, many insurance companies are starting to sell their shares and ownership in these ventures.
“They either sell down completely, or they sell below 25 percent so they are only a financial investor, rather than the original plan of being a strategic investor working together to grow the business,” he says.
China vs Japan
When it comes to acquiring large insurers and reinsurers in the west, Japanese companies have completed more than their fair share of deals in recent years (Sompo Holdings buying Endurance for $6.3 billion, Tokio Marine buying HCC for $7.5 billion), with around $18 billion of deals completed in 2016 alone.
Against a backdrop of almost 0 percent domestic growth, Japan is on a very different playing field from China. “Japan is a very challenging market,” says Guo.
In contrast with China, which boasts double-digit growth, Japanese insurers often have no place to go and must therefore expand overseas.
With the cost of capital being so low compared to that for European or US insurers, they are also able to carry out acquisitions at a very aggressive price.
“Japanese outbound M&A is purely driven by lack of growth and low cost of capital in the domestic markets,” he says.
“Chinese outbound M&A is driven by the growth ambitions of the big conglomerates wanting to expand it domestically, indirectly through overseas acquisition then coming back to China.”
Due to these challenging conditions that force many Japanese companies to look overseas, many of the Japanese are focused on globalising their business and, Guo believes, the Japanese “learned their lesson” on this the hard way.
During the previous wave of Japanese overseas acquisitions in early 2000s, some Japanese companies had sent Japanese executives from HQs to run the acquired companies in foreign countries, however due to a language barrier, and a lack of sufficient understanding of local market, culture, and employees, some of the senior executives of the acquired companies ended up leaving not too long after the acquisition.
These days, however, the Japanese are much more experienced and after acquiring companies in Lloyd’s or the US they retain the respective senior management teams to run the business.
“Sometimes they merge their overseas business into the entity they acquire, and let the foreign management team run with it—attitudes change,” Guo says.
When comparing attitudes towards outbound M&A between China and Japan, Guo suggests the Japanese tend to be a lot more patient in terms of making a transaction happen.
“They usually do a lot of research; the whole process can take one or two years. They spend a lot of time carrying out market research and analysis to identify the targets and build up the relationship and trust with each other.”
Guo believes this is because of the Japanese style of decision-making, which can which can be quite comprehensive and thorough.
By contrast, Chinese insurers are much more aggressive, and are often very focused on making the transaction.
“They can be very pushy in making a transaction happen quickly rather than spending sufficient time up front building the relationship, learning about each other and building the initial trust first,” says Guo.
“Second, they haven’t experienced a downward trend in the domestic market, and therefore haven’t really got ‘burnt’ yet. They take that level of aggressiveness in the domestic market overseas.”
Horses for courses
There is no homogenous market that can be referred to as ‘Asia’, and it is unwise to paint these insurers with the same brush, as they all operate very differently.
Instead, there are different ‘buckets’ used to categorise the different markets within Asia. There are the developed markets (Japan, Korea, Australia and New Zealand), the hub markets (Singapore, Hong Kong), and the emerging markets (China, Indonesia).
Although Singapore itself is not a big market, it is a hub to the south-east Asian countries, such as Thailand, Indonesia and the Philippines, for example.
Similarly, Hong Kong itself is not a big market but acts as a hub to China primarily but also to Taiwan. “They all behave very differently,” says Guo.
How the uptick of acquisitions and influx of capital from Asia into the Western re/insurance markets will play out remains to be seen—but it will certainly change the industry. Just how fundamentally, only time will tell.
Innovation: but not as we know it
As China is still very much a growing market, there is a lot of emphasis placed on innovation, in particular digital innovation.
However, the focus on digital innovation has a different ‘spin’ in China compared to the Western world, according to Guo, as they are more focused on using it generate more business as opposed to reducing costs or improving operating efficiency.
“Digital innovation in China has been very much focused on creating new business models or creating an ecosystem where you’re able to generate more business, more customers, and more volume through partnership with companies, in particular in non-financial services industries,” he says.
An example of this is Zhong An Insurance, the first pure online insurance company in China, and a joint venture between large Chinese insurer Ping An, internet giant Tencent and online marketplace Ali Baba.
Zhong An has no physical branch network, and the focus is on selling small ticket insurance policies with large volume, which is attached to the commerce platform of Ali Baba to protect the delivery against damage during the shipping process or if there are issues with the goods.
It is very much focused on acquiring new customers, getting customers’ data to analyse and launching tailor-made insurance policies, says Guo.
“In the US, or in more mature markets, digital is considered a means of transforming the business with a much broader scope ranging from end-to-end customer journey digitisation and digital IT infrastructure upgrade, to innovative digital products and service offerings.”