News in brief

Asia-Pacific insurance M&As on the increase The momentum of Asia-Pacific mergers and acquisitions (M&As) continues to build, according to AM Best, reflecting changes in local, regional and international underlying market fundamentals since the global financial crisis. According to a Best's report, 'Asia-Pacific Mergers and Acquisitions Seen as More Balanced, Driven by Value Creation,' the region has been a popular destination for M&As, driven by top-line growth prospects for many still-developing markets with low insurance penetration. At the same time, a host of insurers in the region's advanced markets, with a need for diversification, have looked outside the region after gaining a good foothold in domestic markets. The report noted that a few sizeable acquisitions were driven by some Western companies that had been negatively affected by the financial crisis and therefore needed to focus on core markets or lines of business by exiting Asia.hideBut it added: "Some Asian markets continue to tighten regulations, with increasing minimum capital requirements leading to a consolidation trend, particularly in Southeast Asia, as regulators look to enhance market efficiency and competitiveness." It said that regulation is a common trigger for M&As as a direct or indirect result of an underlying need to restructure the industry or market. AXA acquires Nigerian insurer AXA is to acquire a majority stake in Nigerian insurer Mansard Insurance, the fourth largest insurance player in Nigeria. Under the deal, AXA has entered into an agreement to acquire 100% of Assur Africa Holdings which holds a 77% stake in the composite insurance company Mansard Insurance. According to AXA, Mansard is well established in commercial lines, which represents nearly two thirds of its revenues. "This acquisition is a unique opportunity for AXA to enter the largest African economy with leading positions in all business lines and to get exposure to the fast-growing Nigerian retail insurance market. AXA will benefit locally from the knowledge of an experienced and successful management team and from a profitable platform," said Denis Duverne, Deputy Chief Executive Officer of AXA. Moody's sees stable outlook for global P&C sector Moody's Investors Service is maintaining its stable outlooks for the P&C sector globally for 2015. It says that the gradual, global economic recovery and declining unemployment rates will support the growth of P&C premiums in 2015. "We expect P&C premiums to keep pace with economic growth in advanced economies and to outpace economic growth in emerging economies, which supports our stable sector outlook," said Bruce Ballentine, a Moody's Vice President - Senior Credit Officer. "We see P&C penetration rates holding steady in advanced markets and rising gradually in emerging markets." Moody's expects P&C premiums to grow in the low single digits in North America and most of Europe, and considerably faster in emerging markets, which will provide attractive opportunities for growth in 2015, albeit at a slower pace than in recent years. China's nominal P&C growth rate will ease to the mid-double digits, Moody's forecasts. In Latin America, the P&C growth rate could ease with the slowdown in the region's economies, but nominal premium growth is likely to remain in the mid-single digits. Although emerging markets carry unique risks, Latin America offers an improving insurance operating environment along with healthy growth potential, said the rating agency. The report also notes challenges including the risk of natural and man-made catastrophes, pricing/reserving for long-tail lines and an uncertain regulatory environment. Arthur J Gallagher in joint venture with Chinese broker Arthur J Gallagher is to enter the Chinese market after signing a joint venture agreement with Jiang Tai Insurance Brokers to establish a new Shanghai-based operation, subject to regulatory approval. The agreement will see Gallagher take a 24.9% share ownership. The new operation, trading as Jiang Tai Re, is expected to launch in the first half of 2015 and will focus on reinsurance and specialty lines. The partnership is understood to be the first joint venture insurance broker launched in the China (Shanghai) Pilot Free Trade Zone. "With this opportunity to develop the Chinese specialty insurance market, Gallagher will bring its specialty and reinsurance expertise and intellectual capital, as well as extensive captive management experience from within the wider group, to the new venture while Jiang Tai will gain a global footprint from partnering with Gallagher," said the broker. Best expects continued insurer participation in Pool Re Insurers are likely to continue to participate in Pool Reinsurance Co. (Pool Re) despite a proposed increase in the levy for the UK's terrorism pool, according to AM Best. It noted that terrorism insurance is still available globally in the open market, and rates have been under pressure, reflecting the relatively low level of loss activity post-Sept. 11 and plentiful capacity in the reinsurance market. "However, Best expects the UK insurance sector to remain reliant on the backstop guarantee provided by the UK government for terrorism cover, given the magnitude of losses that could result from such an event," said Catherine Thomas, director, analytics. "In particular, losses resulting from nuclear, biological, chemical and radiological (NBCR) attacks could be very high and are extremely difficult to estimate." Yvette Essen, director, industry research - Europe & Emerging Markets, added: "The government currently charges a levy of 10% of Pool Re's annual premium income in return for the unlimited backstop, and H.M. Treasury is now seeking to lift this fee. It has been reported that the levy could be raised to 50% with effect on January 1, 2015." Lloyd's gets approval for Mexican representative office Lloyd's has received approval from the Mexican authorities to open a representative office in Mexico City. Gabriel Anguiano has been appointed as Lloyd's first General Representative in Mexico. He will head up the representative office and will take up his new position in January 2015. Mexico is the largest market for Lloyd's in Latin America, and the market is active in the property, marine, energy and aviation classes of business. Lloyd's Mexico said it will offer the opportunity for the Mexican representatives of Lloyd's insurers to co-locate in the Lloyd's General Representative Office. The General Representative is responsible for Lloyd's legal, regulatory and tax matters in Mexico, managing Lloyd's licensing obligations to the Mexican authorities and promoting the Lloyd's brand. Lloyd's currently supports the Mexican market as a cross-border reinsurer, writing in excess of $412.6m in 2013. Lloyd's has been a registered foreign reinsurer in Mexico since 1986. Thai insurance industry set for growth in 2015 Thailand's insurance industry is likely to grow steadily in 2015 supported by improving economic activity, low market penetration, and a rising middle-income population, according to a new report from Fitch Ratings. In addition, the strengthening in regulatory capital requirements could lead to industry consolidation. Fitch has a stable outlook for 2015 for the non-life insurance sector, based on insurers' solid credit fundamental, strong capitalisation and the growth potential of the industry. The agency also believes the implementation of Phase 2 of a risk-based capital (RBC) framework, while challenging in the short term, would benefit the industry in the long term. "Thailand's insurance regulator is in the process of implementing RBC Phase 2 as part of the regulatory reform to strengthen the industry and be more aligned with the global standards," said Fitch. "The more principle-based orientation should encourage insurers to enhance their internal risk management frameworks. The reform also includes a plan to increase minimum capital requirements for insurers. This is likely to lead to industry consolidation, especially in the fragmented non-life insurance industry." Global takaful insurance market shows strong growth The global takaful insurance market has seen double digit growth, representing 18% Compound Annual Growth Rate (CAGR), during the period 2007-2012 with worldwide gross takaful contributions reaching $18.3bn in the first half of 2013, according to a report from Deloitte. However, the report also says that the size of the industry still remained fragmented and significantly small compared to global Islamic financial assets with a market share of 1.1%. The report, 'The way forward for takaful: spotlight on growth, investment and regulation in key markets,' suggests that there are enormous growth prospects in the Middle East, South Asia and Africa. It says: "There is a clear gap in the level of regulation and government support provided to takaful and insurance firms. Malaysia is by far leading the wave of best practices legislation in the sector, and the Gulf Cooperation Council (GCC) is striving to improve playing field levels for both takaful and insurance firms." But there are increasing concerns among practitioners in both markets about over-regulation and the adverse effect of slowing product innovation, growth, and the ultimate dynamics and competitiveness of the industry, the report warns. Corporates' complacent attitude to corruption risks Control Risks has published its annual survey of business attitudes to corruption. The 2014/15 survey concludes that many global companies, particularly those with operations in emerging markets, remain slow in changing their corporate approach towards corruption. "There is a worrying disconnect between what the headquarters of large multinational organisations believe about their anti-corruption programmes and the reality of what is actually going on at the front line in the higher risk markets," said Control Risk. "The failure to reform internal practices is partly due to budgetary pressures on compliance teams but many companies still underestimate the threat and the cost of getting it wrong." Overall, 87.9% of companies now have company policies explicitly banning bribes to secure contracts. Control Risks said that the introduction of the UK Bribery Act in 2011 is improving the way UK companies do business abroad. Out of all the companies surveyed, those headquartered in the UK are leading the way when it comes to having a board level director or compliance committee with a direct and specific responsibility for anti-corruption. The UK is also the strongest when it comes to forbidding facilitation payments i.e. small bribes to speed up government transactions. But compliance procedures from surveyed companies are still weak in respect of third party suppliers and contractors. Chinese insurers' risk exposure to grow The risk exposure of Chinese insurers will increase over the next few years as their businesses grow, according to Standard & Poor's Ratings Services. "In many cases, capitalisation is already stretched and could be further strained as asset bases expand and investment appetites become more aggressive," said S&P's credit analyst Terry Sham. "Despite a strain on capitalization, financial leverage appears satisfactory for most major insurance groups as indebtedness is generally limited. But the creditworthiness of the largest and smallest insurers could continue to polarize in both the life and non-life sectors." The study shows that the bigger players tend to have the strongest stand-alone credit profiles, partly due to their well-established franchises, extensive distribution networks, and diversified business mixes. Other benefits include better economies of scale, technical know-how, and compliance functions. A handful of insurance groups have the strongest financial and business risk profiles, which offers some protection against industry downturns. S&P said it was maintaining its stable outlook on the non-life sector, partly because underwriting performances are still satisfactory. It said it expected the biggest players and those with underwriting discipline and good niche positions to outperform most of their peers in the coming few years. S&P rates Russian property/casualty sector risk as moderate Standard & Poor's Ratings Services has assessed insurance industry and country risk for the Russian property/casualty (P/C) insurance sector as moderate. This reflects its view of the high country risk and intermediate industry risk that affects this sector. Country risk is high because the economy depends on hydrocarbons and other commodities and S&P expects economic growth to slow. S&P also considers that Russia's weak political and economic institutions damage the economy's competitiveness, investment climate, and business environment, and views its payment culture and rule of law as weak. The intermediate industry risk assessment is supported by the profitability of the market (measured by return on equity), product risk, and barriers to entry. However, S&P said that market growth prospects previously considered positive are now neutral, and the institutional framework, which it considered high risk, is a negative factor. S&P said it had revised its assessment of market growth prospects to neutral from positive. "We believe that, given the weak growth of the underlying economy and current Russian rouble foreign exchange instability, growth of the sector could prove very volatile next year and expect it to be flat in real terms." Fairfax acquires Malaysian insurer Fairfax Financial is to acquire the general insurance business of MCIS, an established life and general insurer in Malaysia. The deal is being done through Fairfax's wholly-owned subsidiary The Pacific Insurance Berhad, which has entered into a business transfer agreement with MCIS Insurance Berhad (formerly known as MCIS Zurich Insurance Berhad) and Koperasi MCIS Berhad. The deal is expected to close in the first quarter of 2015 and the general insurance business of MCIS will integrate with Pacific Insurance and become part of the Fairfax Asia group under the leadership of Ramaswamy Athappan. S&P rates Czech property/casualty sector as intermediate Standard & Poor's Ratings Services has assessed the industry and country risk for the property/casualty (P/C) insurance sector of the Czech Republic as intermediate, reflecting its view of both country and industry risk as intermediate. S&P said that the Czech P/C insurance sector benefits from a supportive environment of stable policymaking institutions that promote prudent economic and fiscal management, and a soundly performing financial system. However, it said that that "shallow" capital markets limit Czech insurers' investment opportunities. The sector's overall profitability is positive, with combined (loss and expense) ratios of about 90%. Prospects for the sector are challenged by the country's slow economic recovery and weak GDP per capita, compared with developed peers, which, may weigh on future industry growth, S&P said. "We assess industry risk for the Czech P/C insurance sector as intermediate, based on our evaluation of five industry-related factors. We see profitability as a supportive factor, and product risk, barriers to entry, and market growth prospects as neutral factors. The institutional framework is intermediate," S&P concluded. More insurance M&A activity forecast for Europe M&A activity in the European insurance sector is likely to increase as firms make the transition to Solvency II regulations and profitability remains under pressure, according to Fitch Ratings. Low interest rates have driven down profits across Europe and business models have come under strain from reforms in some markets. Saturated markets in most big European countries will make buying market share through consolidation an attractive option for some insurers, said Fitch, although it added deals are most likely among smaller insurers because the upcoming transition to Solvency II regulations is likely to be more problematic for them. Larger insurers are more likely to receive a benefit for diversification in the calculation of their capital charges, are generally likely to be better prepared for the new regulations, and have better access to capital if necessary. Fitch said the sharp increase in costs associated with Solvency II will be a greater burden for smaller firms, which are also likely to be less well prepared. RPC boosts international insurance practice Law firm RPC has hired international insurance partner Rebecca Hopkirk from Holman Fenwick Willan (HFW). She is an international property and casualty expert with over 20 years' experience resolving sizeable claims arising from property damage, onshore and offshore energy, oil and gas, and power generation risks. She advises on both coverage and defence on behalf of the insurance market, notably in relation to refineries, mines, steel production plants and other major industrial units. XL appoints head of Data, Analytics and Pricing XL Group's global insurance operation has appointed Tim Pitt to the newly created role of Head of Data, Analytics and Pricing. Based in London, he will report to Susan Cross, XL Group plc's Global Chief Actuary. In the new role, Mr Pitt will also have oversight of XL Group's data model, data quality, and pricing across its global insurance segment.

News in brief

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