Global Insurers Bolster Capital After Crisis
This is the third in a 12-part series of “The Korea Times ? the Boston Consulting Group (BCG) Joint Project” designed to identify new realities in the post-crisis world and provide winning strategies for leading Korean firms in 11 key industries. In cooperation with BCG, The Korea Times will look into a wide variety of issues both in the global economy and major indstries. - ED.
By Yoon Ja-young
Staff Reporter
The life insurance industry is likely to focus on bolstering capital this year in the wake of the worldwide financial crisis, according to Boston Consulting Group (BCG).
"Concern over additional trouble in the credit
market and the strengthening of regulations on capital adequacy will be key management issues for the industry. Insurers with abundant capital will have an opportunity to increase market capitalization," BCG said.
The consulting company expects regulations to get tougher for life insurance firms.
"Rules will get stricter, regarding finance and accounting, capital adequacy, systematic risk management and consumer protection," BCG said.
Industry consolidation, meanwhile, is expected to continue through merger and acquisitions (M&As).
"As bolstering of capital determines the fate of insurers, there will be moves to sell non-core businesses. Restructuring through M&As will continue," BCG expected.
UBS agrees that an increase in M&A activity will be a key theme in 2010.
"A material pick-up in M&A activity seems likely for many reasons, including stronger balance sheets, limited organic growth prospects, historically depressed prices coupled with opportunities created by strategic or forced divestitures, and capital market funding access," UBS said in a report.
However, it added that M&A activity could be tempered by higher asking prices as well as the excess capital constraints and historically weak stock currency of some potential buyers.
Listing is another likely move for some giant life insurance companies. "On top of Dai-Ichi Mutual Life Insurance and Samsung Life Insurance, there are also talks of ING's insurance business and AIG's Asian life insurance business getting listed on the bourse," BCG said.
Dai-Ichi, the second largest life insurance company in Japan, is planning to be listed on April 1. A total of 10 million shares will be issued, totaling 1.5 trillion yen, or $16 billion.
It is the biggest listing ever since that of VISA Card in 2008, and the first among major Japanese insurance players.
Insurers are expected renew efforts to reduce operating figures. "Insurers are still engaged in various cost savings programs, which will be a key earnings growth driver for some companies," UBS said.
BCG said that traditionally guaranteed products will be in the spotlight in the life insurance market again. They had been focusing on derivative insurances for some time amid a bullish stock market, but the global collapse made them return to their customary way.
With population aging having risen as an issue in many developed economies, there will be increased interest and demand on retirement planning. Life insurers around the world are driving sales efforts in this market.
Analysts' outlook on the global insurance market is generally positive.
"Given historic low valuations, we see potential for more of an upside in light of positive global economic growth, stronger capital positions, fewer balance sheet risks, capital markets access, ongoing cost initiatives, and excess capital/cash deployment. But, our positive stance is predicated on improving macro conditions," UBS said in a report.
Among the global life insurance market, China is where firms should be paying special attention. BCG said that China's insurance industry is still young and booming. The life insurance premiums there should continue to grow annually by double digits. "The country's $108.7 billion in such premiums in 2008 represented nearly a twelve-fold increase from the 1998 level. In 2010, life insurance premiums in China could well exceed $150 billion, leaving Germany, currently ranked fifth worldwide in terms of life premiums, far behind," BCG said in a report.
China's insurance industry has expanded rapidly over the past decade, with life premiums growing at about 28 percent annually.
"Compared with other global markets, however, penetration, when compared to GDP, remains relatively low. For instance, in Asia, the insurance markets in Malaysia, Thailand, Hong Kong and Taiwan all have higher penetration rates. This underscores the growth potential that the highly populous Chinese market holds," BCG said.
The outlook for the U.S. life insurance industry, meanwhile, isn't as positive.
Ernst & Young said in a report that 2010 will be difficult year for life insurers as the U.S. economy slowly recovers from the aftermath of the financial crisis.
"Lagging employment with falling aggregate wages, tight credit, weakened residential and commercial real estate and a behavioral shift on the part of consumers from consumption to savings are factors contributing to the delayed economic recovery," it said.
Ernst & Young noted that many companies are reacting to these challenges by following a "back-to-basics" strategy. This approach may help life insurers weather the storm, but hunkering down may not be enough to succeed. "Regaining profitability and growing the business within the current economy will require creative, pro-active steps to improve strategy and execution," it said.