The world’s fourth-largest population, a very low insurance penetration rate and strong prospects for growth are proving a draw for foreign investors eyeing Indonesia’s insurance market. Higher caps on foreign ownership than elsewhere in Asia – 80% of an underwriter’s equity, compared to 49% in Thailand and 26% in India – add to the appeal. With the sector regulator reticent to deliver any new licences for both life and non-life underwriters and looming capital requirement increases, mergers and acquisitions (M&A) have proven an increasingly popular means of buying into one of the world’s most promising insurance markets.
Although the regulator, Bapepam-LK – and from 2013 Otoritas Jasa Keuangan (OJK) – is eager to consolidate the market amongst a smaller number of players, most M&A activity in recent years has involved new foreign entrants rather than consolidation amongst existing underwriters. The higher profitability of the life segment has drawn more attention, although there has been a spate of non-life deals since 2011.
ASSESSING EFFICIENCY: The number of underwriters remains excessive relative to the size of the market, with only very timid consolidation over the past decade: the number of non-life insurers has fallen from 97 to 82 between 2006 and 2012, while that of life insurers has fallen from 51 to 44 in the same period. Credit rating agency Fitch highlights the lack of an M&A culture amongst local insurers in an October 2012 report on the sector. Nonetheless, another credit rating agency specialised in insurance, AM Best, argued in a July 2012 report that the need for immediate equity investments and expertise in a competitive sector are forcing a growing number of smaller players to reach out to would-be foreign investors.
The top tier of the market retains the lion’s share of premiums, with the 10 leading life insurers accounting for 61.9% of the market and the 10 largest non-life players capturing 52.5% in 2011, according to local credit rating agency Pefindo. This raises serious questions about the efficiency of smaller underwriters, who often act as brokers ceding the majority of their risk to reinsurers. As the implementation of the ASEAN free trade agreement looms by 2015, a growing imperative has been to improve local underwriters’ capitalisations to improve their competitiveness and reach.
RAISING THE BAR: Capital requirements have been raised from Rp40bn ($4m) to Rp70bn ($7m) by the end of 2012 and are set to reach Rp100bn ($10m) by 2014. “The higher capital requirements by 2014 will force smaller companies to differentiate their business if they plan to keep up, or else seek a sale,” Christian Wanandi, the president director of Asuransi Wahana Tata, told OBG. Meanwhile the regulator, Bapepam-LK, has stopped awarding licences to new underwriters in either segment over the past decade to spur M&A with smaller players – with the notable exception of a new licence in 2012 for non-life underwriter MPM Insurance backed by private equity firm Saratoga Capital.
Bapepam-LK reported in September 2012 that nine life and 22 non-life underwriters had yet to raise enough equity to meet the new Rp70bn ($7m) requirements, a mere three months shy of the deadline. Following repeated delays in raising capital requirements to Rp40bn ($4m), expected three years before finally being enacted in 2010, underwriters see the potential for further delay in revoking insurers’ licences.
PULL TO FDI: As in other Asian economies, foreign direct investment (FDI) has taken a more prominent position in life than in non-life, driven by higher operating profits and the requirements for larger capital outlays and distribution networks inherent in life. With foreign branches barred, the only option is to invest in a local entity. Foreign-linked underwriters accounted for roughly 70% of life premiums in 2011, compared to a mere 30% in non-life, according to Chartis Insurance Indonesia, part of the American International Group (AIG).
A number of deals in the past two years have illustrated the market’s appeal to foreign investors, starting with the life segment. Seeking to tap into growth in unit-linked products, FDI has been used to harness the burgeoning pool of savings while introducing products with a savings component from other markets.
NEW DEALS: The activity started with three major deals in 2010: two involving foreign buyers, Mayapada Insurance’s sale to Switzerland’s Zurich Life (renamed Zurich Topas Life) and Winthertur’s sale to the UK’s Aviva, and one local deal, UOB Life’s sale to Bhakti Capital (renamed MNC Life). Spurred by a high yen and dwindling prospects at home, Japanese insurers have also flocked to the ASEAN market since then. Mitsui Sumitomo Insurance’s MS&AD bought a 50% stake in Asuransi Jiwa Sinar Mas for $827m (a record of roughly five times book value) in April 2011, while Mitsubishi’s Tokio Marine Insurance bought an 80% stake in MAA Life Assurance for $9.8m in March 2012, renaming it Tokio Marine Life Insurance Indonesia. A fourth Japanese insurer, Meiji Yasuda Life Insurance, raised its stake in Avrist Insurance from 5% to 23% for $100.3m in May 2012, while South Korea’s Hanwha Life Insurance agreed to pay $13m in October 2012 for a mid-sized underwriter, Multicor Life Insurance.
Interest in the non-life segment has also grown of late, with an accelerating rate of deal making. In this segment, FDI has followed affiliated companies’ direct investment in natural resources and, increasingly, manufacturing sectors, particularly in the case of Japanese groups. Nipponkoa Insurance started by raising its stake in non-life player Asuransi Permata Nipponkoato to the 80% ceiling in January 2011, buying out partner Bank Permata’s 31% stake. Bank Mandiri’s 60-40 life joint venture with France’s AXA followed in May 2011 by acquiring non-life underwriter Asuransi Dharma Bangsa and rebranding it Mandiri AXA. Singapore’s SHC Capital acquired 55% of Asuransi Parolamas in December 2011, with plans to list the mid-sized underwriter on the Indonesian Stock Exchange in 2014. Switzerland’s Zuellig Group bought out 80% of smaller-sized Asuransi Indrapura in June 2012. The largest deal in 2012 by a large margin, however, was US-listed ACE Insurance’s acquisition of 80% of Asuransi Jaya Proteksi, one of the three largest non-life underwriters on the market, for about $130m in June. MORE INTEREST, WHICH TARGETS?: Smaller players, particularly in life such as Bumi Asih Jaya, Kresna Life, Nusantara Life or Pasaraya Life, could be easy targets amidst the regulatory push. Panin Financial, meanwhile, announced plans in January 2012 to sell a 40% stake in Panin Life for up to $200m, eliciting bids from Japanese insurers. While there is no shortage of targets on paper, due diligence will be key.
Interest from both local and foreign sources continues to grow, however. Telecoms operator Telkom Indonesia has announced its intention to enter the insurance market, while banks are also seeking to increase their presence. Bank CIMB Niaga hopes to buy underwriters in both segments, while third-largest Bank Central Asia is seeking a life underwriter following its acquisition of a 25% stake in non-life player Central Sejahtera Insurance in early 2011. Makassar-based Bosowa Corp has, meanwhile, earmarked $2.6m to buy into the life segment, it announced in early 2012. A host of other foreign underwriters have announced their intentions to grow inorganically in Indonesia, including non-life players such as US-based Liberty Mutual Group and Australia Insurance Group, as well as life underwriters like Malaysia’s Etiqa (part of the Maybank group, already present) and Canada’s Royal & Sun Alliance.
With intense competition for deals and cautiousness in appraisal of operations, not all will have the same appetite and deep pockets as Mitsui Sumitomo or ACE Insurance in life and non-life, respectively. Underwriters have also called for the exemption of tax on M&A, arguing that the costly process does not involve new profits per se and that taxes could prove a disincentive for all but the most attractive deals. Buying the way into the market is one thing; competing against established foreign heavyweights in the sector such as Prudential, Allianz, AXA, Manulife and AIA is another.
While the growing number of M&A deals has not brought about the long-awaited consolidation in the sector, the regulator will be hoping that competition amongst the growing number of foreign players on the market will foster greater efficiency and innovation. “Consolidation will create a healthier environment as insurance companies strengthen their capital base to become more competitive in future,” Dirman Pardosi, the president director of AJB Bumiputera 1912, said. Differentiating products and distribution channels will indeed be key to extending access and penetration. Foreign insurers will meanwhile seek to transfer lessons learned from the potentially massive Indonesian market to other sizeable emerging markets worldwide.
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