Soft market conditions provide the backdrop for reinsurance industry Merger & Acquisitions (M&As) throughout Asia, although the highly varied local industry dynamics and levels of market maturity create a mixed bag of motives, with some reinsurers driven to acquire by foreign diversification needs while others merge to grow their own local capacity, Fitch Ratings said.
“Steady economic expansion and insurance market growth will remain the fundamental reinsurance driver in Asia-Pacific. Knowledge transfer and human capital build-up will sustain the sector’s development momentum and spur reinsurance premium growth as globally established reinsurers continue to scale-up in the region.
“In some countries, government agendas and economic policy objectives also help shape consolidation activity,” explained Fitch.
For Japanese acquirers, cross-border M&A activity is driven by reinsurers in pursuit of mergers that enable expansion, or improved investment yields as they struggle with low and stagnating domestic growth levels coupled with negative interest rates, Fitch said the acquisition of Endurance Specialty Holdings by Sompo Holdings in March this year is one such example.
Chinese reinsurers are more often driven by the need to diversify business beyond their own country’s borders in pursuit of long-term potential business expansion, however, Fitch noted the push for M&A expansion in China has come under pressure from increasing regulation and Chinese investors appearing to heavily scrutinise overseas acquisitions.
“The proposed acquisition of ACR Capital Holdings Pte. Ltd. by a Shenzhen-based consortium of investors in October 2016 was one such deal where a reinsurer was the target,” explained Fitch.
In Indonesia, the focus is inward, stopping capital from leaving the country through domestic insurers’ ceding of premiums to foreign firms, and the construction of one giant Indonesian reinsurer after merging two local reinsurers, with the aim to retain dominance of reinsurance business locally.
Over the long-term, the government hopes to create a reinsurer large enough to move from its local moorings into international waters.
Fitch said infrastructure spending, cyber insurance growth and increasing demographics moving into the middle class range within the region will continue to spur reinsurance growth.
Competition is expected to intensify in some areas as increasing numbers of global reinsurers remain attracted to business in the region, and domestic firms grow in number, sophistication and capacity, and this in turn will fuel the need for M&As.
In the Chinese market, where the country now has four domestic reinsurers, Fitch highlighted non-life insurers who are currently undersupplied with reinsurance capacity as standing to gain from greater ceding options – and as driving demand for more reinsurers to move into the region.
The Asian reinsurance market presents an up and coming region of opportunity and growth for the global reinsurance industry, profits and premiums have often been tightly guarded by local regulators who ensure this stays within the respective markets.
However, governments are recognising the need for greater collaboration with the global community for some large-scale government initiatives to shore up development through reinsurance, such as China’s Belt & Road initiative and India’s government agricultural insurance scheme.
M&A activity in Asia is as varied as the potpourri of market spaces within the region, but the combination of soft market conditions globally and space for growth domestically create incentives that will continue to drive merger activity.