The need for adequate capital, good governance and risk management practices are other pertinent factors that have heightened the merger and acquisition (M&A) trail in the financial services sector.
Industry observers say the easing of restrictions on foreign ownership of Malaysian insurers to 70% from 49% effective last year under the financial sector liberalisation plan and the introduction of the risk-based capital (RBC) framework will likely see more M&A activities in the pipeline.
The move to allow foreigners to hold a 70% stake in insurance companies also applies for Islamic banks and takaful operators. The RBC framework, which was launched in January 2009, is aimed at ensuring insurance companies have ample capital to undertake risks in their daily operations.
Ernst & Young Malaysia executive director Brandon Bruce Sta Maria says there will continue to be opportunities for consolidation in the insurance industry.
According to Sta Maria, the smaller and less profitable insurers will continue to be targets for acquisition, especially by foreign insurers interested in penetrating the Malaysian market with the relaxation of foreign equity participation on a case-by-case basis for companies that can facilitate industry consolidation.
He notes that of late, consolidation has been largely focused on the general insurance industry. In the past one year some notable deals include the sale by Jerneh Asia Bhd of its 80% stake in Jerneh Insurance Bhd to US-based insurer ACE INA International Holdings, the sale of Pacific Insurance Bhd to Fairfax Asia Ltd, the acquisition of BH Insurance by AXA Affin General Insurance and the subsequent merger of the two.
Several negotiations are still ongoing for potential M&As. MAA Holdings Bhd is still negotiating with Zurich Insurance Co Ltd to dispose of its wholly-owned subsidiary, Malaysian Assurance Alliance Bhd (MAAB).
Allianz Malaysia Bhd is believed to be keen on forming a joint venture with Takaful Ikhlas to tap into the lucrative takaful industry.
OSK Research last month said it expected more M&A news in the local insurance industry driven by an easing of regulations by Bank Negara.
“The liberalisation of the foreign equity ownership limit to 70% by the central bank and the implementation of the risk-based capital framework are catalysts for heightening M&A as well as consolidation in the country,” it notes.
While adequate capital under the framework is good for an insurer or takaful operator as it allows for diversification and acceptance of higher business and investment portfolio risks, Sta Maria says what is more important is the placement of robust governance and risk management practices, adding that this will ensure resilience of the company in the event of a financial crisis.
Malaysian Rating Corp Bhd vice president and head of financial institution ratings Anandakumar Jegarasasingam says consolidation is more likely in the general insurance sector as a result of the higher capital requirements arising from the RBC framework as well as the competitive intensity in the sector.
As for the life insurance sector, Anandakumar adds it is possible for local insurers to become the target of foreign investors, especially considering the still low penetration rate in the country.
Prudential Assurance Malaysia Bhd CEO Charlie E. Oropeza says although there is some downside to consolidation, on the whole it will allow greater competition, resulting in better services to customers, more competitive pricing of products as well as more innovative products.
RAM Ratings head of financial institution ratings Promod Dass says the Malaysian insurance sector does not see a significant consolidation drive as that experienced by the banking landscape under the last financial sector master plan, given the priority of bolstering the banking sector after the 1997/98 Asian financial crisis.
But Bank Negara's new financial sector blue print t may spark and ignite the consolidation of domestic insurance players and the germination of new local and foreign takaful players, he adds.
Dass reckons that what needs to be addressed in the insurance industry is the under-penetration of insurance, particularly in the life insurance and family takaful space.
“The potential for the domestic insurance-takaful sector is largely untapped.
“Changing the status-quo will require a strong regulatory push as well as “carrots” in the form of more incentives for the industry.
“This move will start a chain-reaction to drive the insurance sector to the next level and eventually bring up the penetration of insurance in Malaysia to a more significant level,” he says.
Will these acquisitions set a benchmark price for the industry? Previous deals, according to news reports, ranged from 1.57 times for Pacific Insurance to 2.24 times for Jerneh Insurance, while Hong Leong Assurance was sold for 6.5 times book.
An analyst says one should look beyond the benchmark price. “The final price still boils down to how much premium the acquiror is willing to pay for the licence and how much the acquiree's view of his business structure and embedded values,'' he adds.
With the consolidation in the near horizon, will this mean that organic expansion will take a back seat?
Oropeza says organic growth and expansion are crucial for the insurance industry as currently only 41% of Malaysians have life insurance coverage and gross domestic product (GDP) to life insurance stands relatively low at 2.8%.
On the takaful front, he says the way forward should be by growing organically and issuance of new licences.
Last September, four new family takaful licences were issued on a joint venture basis.
The joint ventures are between American International Assurance Bhd and Alliance Bank Malaysia Bhd, AMMB Holdings Bhd and Friends Provident Group plc, ING Management Holdings (M) Bhd, Public Bank Bhd and Public Islamic Bank Bhd and Great Eastern Life Assurance Co Ltd and Koperasi Angkatan Tentera (M) Bhd.
Based on Bank Negara's website, there are currently 11 operators in the takaful segment.
M&As heating up
Takaful Ikhlas Sdn Bhd president and CEO Datuk Syed Moheeb Syed Kamarulzaman says organic growth is important but to expand fast it will be better for takaful to merge as its penetration rate as at June last year was around 10.3%.
He says he expects a flurry of new M&As to arise when the proposed RBC framework for the takaful industry comes on stream in the near future.
Moheeb, who is also the chairman of the Malaysian Takaful Association, in a recent news report said this would lead to consolidation as some takaful operators might need to inject new capital under the proposed framework to maintain their licence to operate, resulting in the smaller ones to consolidate.
He adds that the takaful industry can expect a double-digit growth in 2011 of total net contribution. In 2010, the industry grew at 23.2%.
Moheeb is expecting more medical and health products in the takaful market in line with growing demand.
He is also anticipating the growth of alternative distribution channels like internet and bancatakaful.
Besides this, Moheeb sees more investment-linked products and products with affordable contributions.
“Takaful sector has huge potential for the players to tap on. These players need to be more aggressive in attracting more participants including the non-Muslims.
“In addition to that, the sector also requires support from other sectors such as Islamic banking and sectors like small and medium enterprises,'' he stresses.
Meanwhile, Syarikat Takaful Malaysia Bhd (STMB) group managing director Datuk Hassan Kamil feels that for takaful, it would be better to grow organically as the companies are too young to merge since their systems and processes have yet to mature and work efficiently.
They need more time to build a strong foundation to merge, he says.
Hassan adds that although there is strong potential in the takaful business, nonetheless talent shortage and staff turnover is the main concern besides intense competition among takaful operators leading to “suicidal” and not sustainable rates for the general takaful commercial insurance.
As a result, some takaful operators are suffering losses or low underwriting surplus due to reckless underwriting and pricing, he adds.
For takaful to grow, Hassan says, there should be proper framework and prudent management in the industry as the takaful base is still small compared with conventional insurance.
ING Insurance Bhd president and CEO Datuk Dr Nirmala Menon feels that the takaful industry has still got a long way to go and should focus on penetration of the underserved Muslim population.
For this to happen effectively, she adds there needs to be an emphasis on consumer education.
Given where Malaysia is, both in terms of penetration and spend by GDP, Nirmala believes there is ample opportunity for the industry to grow in the coming years as awareness and disposable income improve and age advances.
On the Islamic financial landscape, the central bank is still reviewing offers to establish up to two new Islamic banking licences with at least US$1bil of paid-up capital, a move which the Government hopes will spur more lending and enable it to compete with global lenders.
OCBC Al-Amin Bank Berhad director and CEO Syed Abdull Aziz Syed Kechik says consolidation in Islamic banking will extend its geographical reach but at an operating level, Islamic banks have to continue their organic growth to maintain incremental business momentum.
He says there is still ample room in the local market for players to capitalise on the organic growth strategy, and internal investments will continue to be crucial in supporting business expansion.
Abdull Aziz says for Islamic banks to grow, they need to venture beyond the traditional markets and establish footholds in emerging markets like Indonesia, Singapore and Thailand.
Source: The Star Malaysia