Asia Pacific While the overall trend in M&A has drifted downwards over the last four years, activity in the last 12 months has been stable: there were 57 deals in total, compared to 58 the year before. This, however, is probably not an accurate reflection of interest in the region, which remains keen, but says rather more about difficulties around finding the right targets and limitations on investments in many markets. It is difficult to talk about regional trends across an area of considerable economic and geographic diversity. However, both domestic and international insurers in Asia-Pacific are starting to benefit from the organic premium growth potential across the region, which is being delivered by increasing levels of growth and improving penetration rates. The result is that there are some significant deals being done – five of the largest global insurance transactions were Asia-based last year – and there are some common trends driving activity across a number of markets.

Volume of deals in Asia Pacific 67

36 38 33 34 33 30 27 27 20

H1 2009 H2 2009 H1 2010 H2 2010 H1 2011 H2 2011 H1 2012 H1 2012 H2 2012 H1 2013

For example, regulators in many markets are looking at the but they are increasingly looking to the Middle East actions of the authorities to strengthen insurer solvency in and Eastern Europe for opportunities as well. It is also Europe and the US, and are taking similar steps in this likely that some re/insurers from the more developing direction. The Life and General Insurance Capital economies will start to look at international investment framework in Australia is one good example. While the opportunities. specifics may be local to each country, the overall trend to Another trend we are starting to see is private equity fewer, stronger insurers will undoubtedly lead to market (PE) houses taking an interest in insurance targets in the consolidation in many places. region. However, this may take some time to manifest Insurers from developed markets such as Japan are still itself in deals as PE investors need to build their insurance looking to the developing economies for growth and expertise and be able to offer target companies genuine profitability. Primary targets appear to be in the regional partnership, rather than just capital. emerging markets such as Indonesia and Malaysia, Deals in Asia Pacific by country: 2009 – 2013

70

60

50

40

30

20

10

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a n a ia ia ia n d g m a lia in s s d a n n a re p re h e y n o o a tra o n I iw ila K tn p J s K C o la a a d T h g ie ga Au th Ma T n V in u In o S o H S

Japan Deal activity in Japan picked up in the second half of 2012 While the monetary easing policy undertaken by the and the first half of 2013. While there were some domestic government and the Bank of Japan appears to be broadly transactions, the majority were outbound investments. The positive for economic development, it is less clear what the only inward investment took place in April 2013 when Swiss impact will be on insurers. However, in April of this year, Re bought a 13.5% stake in Japanese insurer Lifenet Insurance Moody’s commented that it could have several negative Co for USD 41 million, making it the biggest shareholder. effects on Japanese life insurers, including a reduction in economic capitalisation and an exacerbation of negative While economic activity has picked up in Japan over the yields and reinvestment risk. last six months, the insurance market still struggles with low investment returns, a shrinking domestic market and Australia the losses from the earthquake and tsunami of 2011. As The Australian insurance industry has faced considerable a result, there is a continuation of last year’s trend where challenges over the last few years, with a hardening of the domestic insurers are seeking to diversify their business property market and large falls in interest rates beyond Japan’s borders. The result has been a spate of that have affected insurers’ profitability and caused some deals abroad – largely in developing economies in Asia, the to review their risk appetites. Despite this, however, the Middle East and Central Europe. industry remains resilient and its solvency position strong. Notable deals included Insurance Co buying Nevertheless, the combination of natural catastrophes a stake in Bao Viet Holdings for USD 340 million; Nippon and the global financial crisis proved a real test of Life Insurance Co buying a stake in India’s Reliance Capital reinsurance arrangements and – while broadly they Asset Management Ltd for USD 289 million; and Meiji performed well – the situation did cause the Australian Yasuda Life Insurance Co buying shares in Poland’s TUiR Prudential Regulatory Authority (APRA) to conduct a Warta SA for USD 285 million. Holdings Inc close examination of industry practices. This included and Tokio Marine & Nichido Fire also carried out a number stress testing when setting reinsurance arrangements, of deals. challenging boards and senior management on catastrophe modelling, and looking at pricing and South Korea reserving. In a market with high levels of competition and While both the life and non-life insurance markets ongoing low interest rates, there is also a clear focus on are among the most saturated and competitive in the disciplined underwriting. world, there are still growth opportunities available. In Actual and potential counterparty risk to reinsurers is the property and casualty sector, this is being driven also seen by the regulator as a key risk and APRA has an by the development of large-scale transport and other ongoing interest in both the geographical spread and rating infrastructure projects undertaken by the South Korean of reinsurance counterparties. government; rising consumer awareness about the benefits of non-life insurance products; and the expansion The maturity and consolidated nature of the Australian of distribution channels across the country. insurance industry meant that pure M&A activity was relatively quiet between July 2012 and June 2013, and there Moody’s Investors Service said in February 2013 that were no inbound investments. This is unsurprising given the outlook for South Korea’s life insurance industry the developed nature of the market: it is likely to be only is stable, backed by likely steady growth in premiums, highly specialised or niche players that can find a home a more stringent regulatory framework and an ageing here going forward. population. Moody’s said: “Korea’s stable economic growth and inflation will support steady demand for life insurance There was, however, notable activity in the legacy sector products. We expect total premiums to grow 6.0-6.5% in under the Insurance Act 1973 (Part III Division 3a) as the next 12-18 months.” businesses look to rationalise their structures and gain capital efficiencies. Suncorp, for example, rationalised its As with a number of countries across the region, five licenses into one in this way. regulators are seeking to bolster consumer confidence in the insurance industry by implementing measures to Regulatory change in the form of the Life and General increase product transparency and service standards. As a Insurance Capital framework (known as LAGIC) took effect result, South Korea’s Financial Supervisory Service is now in Australia in January 2013. This framework brought inspecting insurance sales in requirements similar to Solvency II, but Australian insurers are largely well placed to handle them, so this is Recent transactions illustrate the fact that South Korea unlikely to lead to a spate of deal activity. remains attractive to inward investors. For example, a group of investors led by Hong Kong’s Affinity Equity bought a The focus for Australian insurers is still firmly USD 1.1 billion stake in Kyobo Life Insurance Co., Ltd, the on emerging markets, with a particular focus on smallest of South Korea’s ‘Big Three’ life insurers, which is bancassurance deals to achieve efficient and effective now thought to be heading for a stock market listing. France’s distribution in new markets. QBE Insurance Group SA, itself seeking growth opportunities outside mature Ltd, for example, continued its overseas expansion by European markets, bought Ergo Daum Direct Insurance for buying ’s Hong Kong general insurance USD 44 million in August 2012. operations in July 2012, as well as HSBC’s Latin American insurance operations. Of the former QBE said in its With opportunities for organic growth quite limited, annual report: “This [deal] was complemented by a 10- South Korean insurers are considering expanding into new year bancassurance agreement wherein QBE became the markets abroad. In terms of outward investments in the exclusive provider and underwriter of bancassurance last 12 months, South Korean insurer Hanwha General general insurance products to Hang Seng Bank’s Insurance bought two Indonesian companies: Multicor Life customers in Hong Kong and mainland China. The Insurance Pt and Transpacific Mutual Capita Pt. distribution agreement provides increased penetration into the Hong Kong market and the opportunity to advance our interest in exploring mainland China through the bank’s strong operations in that country.” China insurance companies, reinsurance companies and insurance intermediaries. However, in 2012, foreign life China is now the second largest economy in the world, and property and casualty players only held 4.3% and 1.2% with a GDP of USD 8.3 trillion in 2012. The OECD has respectively of the Chinese insurance market. predicted that China will overtake the US as the world’s largest economy around 2016, and in this year’s survey This is partly because barriers to entry for foreign players by PwC, global CEOs have rated China as the world’s top remain substantial. Under current rules, 25% is the destination for foreign investment. maximum holding a single foreign investor is allowed to have in a domestic general insurance company. However, China’s insurance market has been developing at a this option remains the most straightforward route as phenomenal pace, growing even faster than the economy those companies looking to open an office or subsidiary itself. The market has witnessed average annual growth in China need to overcome a number of hurdles – and the of 22.2% in the last seven years, while global insurance application process for an insurance licence can take more premiums grew by 2.7%. The market started almost than three years. two decades ago with a single player, People’s Insurance Company of China (PICC), and is now the sixth largest in Nevertheless, the biggest deal of the 12-month period the world, with more than 100 market players generating was Thailand’s Charoen Pokphand Group’s purchase direct written premium of USD 253 billion in 2012. of a minority stake in for USD 9.38 billion from HSBC, which is divesting holdings to improve It is expected that the market will continue to grow across profitability. Founded in 1988 as China’s first joint-stock a number of areas. For example, China is currently facing insurer, Ping An has grown into one of the world’s largest, a number of issues around food safety, air pollution, an with 74 million clients and more than 175,000 employees. ageing population, and natural disasters. The government has decided to go down a mandatory insurance route to The other inward investments involved Hong Kong’s address them, and pilot schemes on food liability and China Taiping Insurance Holdings Co Ltd increasing its environment liability insurance have been introduced in ownership in subsidiaries Taiping Pension Co Ltd and various cities. In addition, the new Social Insurance Law Taiping Asset Management Co Ltd. has been designed to increase the coverage of pension and The remaining spate of deals were domestic, with notable medical insurance. Shenzhen will be piloting a catastrophe instances including Agricultural Ltd buying insurance programme with support from the local a stake JIAHE Life Insurance Co Ltd for USD 393 million; government to find a suitable catastrophe insurance model and Sino Life Insurance Co Ltd buying Gemdale Corp for for China – a country with high flooding and earthquake USD 266 million. Bancassurance continues to play a very risks, only 1.4% of which are currently insured. significant role in the Chinese market. China’s five largest The opening of the motor third-party liability insurance state-owned banks are all participants in the insurance market in 2012 represents a major opportunity, as does any market, and for life insurers in China, banks are now possible opening up by the regulator of other key areas of the most important distribution channel. In another the market. For example, on the life side, changes around key deal in 2012, ICBC bought shares in AXA Minmetals pensions, retirement products, tax incentives and health Assurance Co Ltd for USD 179 million. In the aftermath insurance could allow foreign insurers to leverage their of the deal, ICBC-AXA Life reported a 2,472% increase in knowledge and expertise. All of this means that China bancassurance sales, according to Asia Insurance Review. remains a very attractive destination for international Despite 2011 seeing the first direct investment by a underwriting businesses. Chinese insurer in the Lloyd’s market – ’s The market started to open up to foreign investment on partnership with Catlin – there were no similar deals China’s accession to the World Trade Organisation in this year. Chinese domestic insurers are facing a more 2001, and is now almost fully open. There are currently challenging regulatory environment, with increasing 55 foreign insurers in the market and 100% foreign capital adequacy pressures, significant shifts in shareholding is permitted for property and casualty distribution and a shortage of local talent. This will mean that, while their longer-term goals might include Finally, takaful – where members contribute money into international expansion, in the shorter term their focus a pooling system in order to guarantee each other against will remain domestic. However, Lloyd’s is likely to remain loss or damage – remains a very significant opportunity in of interest to Chinese companies in the coming years. Indonesia as it is the largest Muslim country in the world, and the insurance market is still largely untapped. In fact, Indonesia a number of insurers are appraising Indonesia purely for In a region that offers promising growth for the insurance the takaful opportunities it represents. industry, Indonesia is widely held to be a stand-out market with some staggering metrics. Premiums are increasing 11% Malaysia year-on-year – five times the growth rate of Europe or the Compared to other countries in the region, the Malaysian US. Life products reported a 37% annual rise in early 2012, insurance market saw a high level of M&A activity and one major European insurer recently reported a 100% between July 2012 and June 2013. Part of its attraction annual growth rate in premiums. Although these numbers is the relatively relaxed foreign ownership regulations – can only be achieved from a low base – penetration rates are foreign investors can buy up to 70% of a domestic insurer around just 5% – they remain impressive. – combined with strong economic potential and a growing population. Another area of interest is takaful insurance. There are of course challenges for insurers looking to At present there are very low levels of insurance coverage, establish themselves in this market – not least of which particularly in the Muslim community, so this is a sector are the physical size of the country and the lack of that provides significant potential – especially when infrastructure, which make it difficult to reach parts of the coupled with increasingly sophisticated distribution population. In addition, for those seeking to enter through methods, such as bancassurance. acquisition, there has been a lack of attractive targets, with many local insurers being under-capitalised and One of the most significant deals was the purchase by badly managed. Hong Kong’s AIA International Limited of ING Management Holdings (Malaysia) for USD1.7 billion. AIA Group CEO and In the last year, the government has taken some key steps president said: “With a combined customer to tighten up regulation significantly, with new rules base of over 2.6 million people, approximately 16,600 including a 250% increase in capital requirements for agents and an exclusive bancassurance relationship with insurers by the end of 2014. With many small companies one of Malaysia’s leading banks, our business in Malaysia unlikely to be able to fulfil this, there could be a flurry represents a very powerful proposition that will result of M&A activity. This will be helped by the fact that the in a positive outcome for our shareholders, customers, foreign ownership limit in Indonesia is 80% – much higher employees and agents.” than many other markets in the region. The only other foreign investment involved South The second half of 2012 and the first half of 2013 saw a Africa’s Emerging Markets buying a 49% stake spate of deals – all of them involving overseas insurers in Pacific & Orient Insurance for USD 88 million. Sanlam investing in Indonesia. There is particular interest from Emerging Markets Chief Executive Heinie Werth said: insurers from mature markets who are looking outside “This transaction is our first foray into the South East Asia their borders for growth. Two of this year’s deals involved region. We believe that this transaction will provide us South Korean company Hanwha General Insurance, with a platform to gain an understanding of the region and while Japan’s Tokio Marine Holdings Inc also made two a footprint on which to expand … We are confident that acquisitions. ACE continued its Indonesian expansion with the company offers us a relatively low risk entry into the the acquisition of 80% of PT Asuransi Jaya Proteksi in a market and a platform for growth.” transaction worth approximately USD 130 million. There were seven domestic deals during the year, with the In other trends, some PE investors have started showing an biggest being AmG Insurance Bhd buying Kurnia Insurans interest in Indonesia, but Indonesian insurers tend to look for (Malaysia) for USD 514 million in September. Further strategic partners and are unlikely to want to partner with PE consolidation in the sector is expected. companies until they are more experienced in the sector. India Taiwan While the Indian insurance industry struggles to overcome Taiwan is a mature, highly saturated insurance market. the challenges and uncertainties of the last few years, there According to Ernst & Young, Taiwan had a non-life can be little doubt that the fundamentals that underpin insurance penetration rate of 3.1% in 2011, and a life future growth remain strong. However, India is somewhat insurance penetration rate of 13.9% – relatively very high out of favour with foreign investors at present, and a for the region. number of companies are contemplating exiting or have put Recent years have seen Taiwan’s popularity with outside their entry or expansion in India on the backburner. investors decline, with many exiting its insurance market This is partly because of the slowdown in growth; after due to the high level of product guarantees and the registering impressive growth of around 8-9% in the downward pressure this places on margins. Taiwan’s last decade, the economy has visibly slowed in the last insurance trade has remained sluggish since the global two years. For the insurance sector in particular, the economic crisis, and changes to accounting rules that foreign direct investment limit remains at 26%, and the raised capital requirements for insurers, as well as strict fact that the long expected increase to 49% has still not local regulators and market volatility, have led to many materialised remains a source of frustration. In addition, international groups questioning their continued presence some companies have been in India for up to 10 years in the country. and feel that a disproportionate amount of value is being Unsurprisingly in light of that, there were no inward captured by their joint venture partners. Finally, India investments in Taiwan during the period from July 2012 is perceived by some as a drain on capital that is much- to June 2013. There were, however, several domestic needed elsewhere. transactions, continuing the trend for domestic mergers Despite a sense of gloom, the Indian insurance market to create better-capitalised carriers. saw a number of domestic deals between July 2012 and June 2013, the most significant of which involved Exide Thailand Industries Ltd buying ING Vysya Life Insurance Co for Thailand is South-East Asia’s second largest economy and, USD 102 million. Newspaper reports indicate that Indian while the effects of the devastating floods in 2011 are still property developer DLF Ltd has agreed to sell its 74% stake being felt, there are a number of factors that make it an in a life insurance joint venture with U.S.-based Prudential attractive destination for multinational insurers looking International Insurance Holdings Ltd to Dewan Housing to expand into emerging markets. For example, as well Finance Corp, an Indian housing finance company. as strong economic fundamentals and a growing middle class, there is a regulator that is keen to encourage growth. International acquisitions were limited to Japan’s Insurance Co buying a 26% stake in Reliance Capital In March 2012, the Office of Insurance Commission (OIC) Asset Management for USD 289 million. For Japanese nearly doubled the limit on the percentage of a Thai investors – whose cost of borrowing is far lower than for insurer that a foreign company could own, from 25% to companies operating in countries like the UK, and who 49%. In addition, the OIC can authorise a higher than have a real need to look internationally for growth – there 49% ownership, if a joint venture encounters financial is a much greater willingness to play a long game and difficulties. Risk-based capital benchmarks have also been patiently await the returns they are confident the Indian put in place to increase transparency and bolster capital market will one day deliver. strength: in January 2013, the minimum capital adequacy ratio was increased to 140%. The OIC is also planning to While deal activity is likely to remain fairly stagnant until amend Thailand’s insurance licensing rules to streamline the government opens up the insurance sector, longer the merger process and facilitate consolidation. term, India is still a huge market with lots of potential, so it should stay on the radar of insurers. Nevertheless, many companies seem to be operating a The opportunity became available as part of the ongoing ‘wait and see’ approach. The second half of 2012 and the sell-off of several of ING’s business units demanded by first half of 2013 saw three acquisitions by Thai companies, the Dutch government after providing a USD 12.9 billion two of which were domestic. The most significant was bailout during the financial crisis. The acquisition marks Prudential Life Assurance completing its purchase of the first step in Pacific Century’s plan to develop a world- Thanachart Life Assurance Co for USD 568 million. In an class pan-Asian insurer to capitalise on the long-term interesting add-on, considering the rising popularity of potential of the insurance sector. bancassurance in Asia Pacific, Prudential Thailand and There were a number of other transactions – all within Thanachart Bank announced a 15-year partnership to Asia Pacific – that also aimed to increase the regional develop their bancassurance business in Thailand. footprint of the acquirer. The most sizeable was AIA The major story of the year concerned an outward International Limited buying ING Management Holdings investment. In the biggest deal of the period, Charoen (Malaysia) for USD 1.718 billion in December 2012 – a deal Pokphand Group (CP Group) , a conglomerate controlled that will make AIA the leading life assurer in that country. by Thailand’s richest man, bought a 15.6% stake in AIA also acquired two businesses in Sri Lanka. China’s Ping An Insurance from HSBC for USD 9.38 billion. HSBC sold its profit-making general insurance business in This was a major departure from its core food business, Asia to France’s AXA SA, and the sale included a 10-year although CP Group has a long history in China. bancassurance agreement. Stuart Gulliver, HSBC Group Hong Kong Chief Executive, said: “[This] will enable us to focus our capital and resources on the growth of our core businesses, Hong Kong is one of the most dynamic insurance markets including the building of our broader wealth management in the region, if not the world. The combination of its capabilities. These long-term collaborations with AXA will location; its effective regulatory framework; and its broaden and strengthen the suite of general insurance credible legal system have all contributed to it establishing products available to our retail banking and commercial itself as a leading insurance centre in Asia. banking customers in Hong Kong, Mainland China, 2013 is expected to see the introduction of legislation Singapore, India, [and] Indonesia.” that will make significant changes to the regulatory environment in Hong Kong. Like other sectors of the economy, insurance in Hong Kong has traditionally been subject to the principle of minimum intervention. However, while positive, the introduction of the proposed new Independent Insurance Authority will significantly increase the costs to insurers and insurance intermediaries of meeting more stringent regulation. All of this – plus new privacy and personal data obligations – will place a high, and increasingly costly, administrative burden on the insurance industry over the coming year. In terms of M&A activity, the relatively low number of targets in Hong Kong will always limit transaction activity. However, last year saw the purchase of ING Groep’s Southeast Asian life insurance, general insurance, pension and financial planning units in Hong Kong and Macau by Pacific Century Group, as well as the life insurance operation in Thailand, for USD 2.14 billion.