, Hong Kong

M&As heat up in Hong Kong insurance

An invasion is afoot in the Hong Kong insurance industry, and it is led by non-insurers entering the market to acquire established local players. Even technology behemoths seeking synergies are in on it. In June 2016, mainland Chinese real estate company Fujian Thai Hot Investment agreed to purchase the life insurance operations of Dah Sing Financial Holdings for US$1.3b (HK$10.6b), whilst Jack Ma’s Alibaba-backed Yunfeng Financial agreed to buy the Asia unit of MassMutual for US$1.7b. Analysts reckoned the former deal is an example of a non-insurer firm spending billions not merely to diversify, but to own a strategic enterprise that can fuel their other lines of business.

“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,” said Kevin Angelini, head of strategy for the insurance consulting and technology business in Asia Pacific at Willis Towers Watson. “That said, a future challenge will be effective asset-liability management of the insurance portfolio and potentially also capital management.”

Meanwhile, he noted the Alibaba deal represents the growing ambitions of acquirers to be at the forefront of digital revolution in insurance. By integrating insurance technology, or insurtech, such as robo-advisory technology and advanced data analytics into the traditional insurance business model, Alibaba is hoping to create superior value and spur high growth.

Insurtech and digital tools
“The most widely cited single factor for value creation in M&A deals is customer retention, and insurtech plays a significant role in that by improving customer engagement through the use of data and analytics,” said Angelini. “Digital tools are nowadays an important way to enhance the interaction between insurers and policyholders, and create engaging customer experiences.” He cited the rise of mobile apps that are used to report claims by submitting photographs of damage. This more convenient process helps increase customer satisfaction since claims can be processed faster.

Looking beyond the Hong Kong market, Michael Wada, partner, London EMEIA financial services, transaction advisory services at EY, said a majority of companies involved in M&A insurance deals reported more value is being created. Around 75% said they now generate cost synergies of more than 30% of the target’s cost base, compared with only 22% in 2015. He also said the survey showed significant focus and attention is now being put to manage the customer experience or journeys, and protecting innovation levels in the business.

A major concern
The digitalisation trend is also a critical concern for acquirers. “Insurers expect new technologies, such as financial technology, blockchain, artificial intelligence, and robotics to dominate future integrations and target operating model design, but the most impactful trend today and tomorrow is data analytics,” said Wada. But in making M&A insurance deals, companies reported two potential improvements, with 70% citing governance and decision-making as a potential area of focus, whilst 62% point to synergy realisation planning and tracking. The latter is the most commonly ranked as the important change that insurers could make during future integrations, said Wada.

He also said insurers are now acutely aware that in any given deal, uncertainty can prompt talented employees to leave the organisation and push customers away, and have made measures to prevent either from happening. Amongst the survey respondents, only 12% said more than a quarter of the target’s employees left during the first year following a transaction.
 

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