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Ashvin Parekh

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Information about Ashvin Parekh
Education

Published on January 24, 2008

Author: Manfred

Source: authorstream.com

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Presentation at FICCI’s Conference on Indian Insurance Industry: New Avenues of Growth:  Presentation at FICCI’s Conference on Indian Insurance Industry: New Avenues of Growth 19th October 2004 Is Capital a Constraint? Table of Contents:  Table of Contents Background Uncertain Outlook for Capital New Wave of Mergers and Acquisitions in North America European Insurers Clean House Top Insurance Deals 2003 Asia Pacific – Chinese IPOs Improve Picture The Indian Story so far Background:  Background Overview Insurance companies around the world will once again face a challenging environment in 2004. Product pricing has begun to soften, operating costs are still too high, capital remains tight and investment returns low, while an avalanche of regulations requires stronger financial reporting and controls. One positive sign is that economic growth has picked up in many countries. In 2003, gross domestic product rose strongly in the United States. The economic contraction in France and Germany appears to be over, while Britain and Spain are expanding steadily. Japan looks to be finally recovering from a decade of major economic problems, and China, India, and parts of Southeast Asia are showing strong growth. After several years of inactivity in mergers and acquisitions, 2003 brought a number of major deals. Most were driven by a desire for scale, but equally important were the opportunities to build business lines and increase distribution. At the end of 2003, AXA chief executive Henri de Castries said his company was considering making acquisitions throughout Europe amid growing signs of a recovery in the global insurance market. “We have come out of the storm,” said de Castries. “Insurers are less rich but better managed.” Uncertain Outlook for Capital. The rise in share prices in 2003 has provided some insurance companies with new capital for the first time in several years. Yet many companies are still struggling with severe capital constraints as investors continue to demand higher returns. Uncertain Outlook for Capital:  Uncertain Outlook for Capital The rebound of the equity markets around the world means that, for the first time in several years, many companies are beginning to have capital to invest. But capital constraints remain a major concern for most of the industry. Many companies have not yet replaced the capital that was lost after the September 11 terrorist attacks. Europe, capital remains particularly tight, and major insurance companies are getting rid of holdings to focus on their core business and improve the bottom line. With the insurance market softening around the world, prices and business volumes are likely to decline, depressing industry profits. Investors remain cautious, demanding higher returns on equity than most companies have generated recently. Total equity offerings in 2003 for all insurers totaled $11.28 billion, with debt offerings reaching $16.43 billion. China Life Insurance Co. had the largest initial public offering, raising more than $3 billion, with Cendant, MetLife, and American Express leading in new debt offerings. New Wave of Mergers and Acquisitions in North America:  New Wave of Mergers and Acquisitions in North America North America saw a flurry of mergers and acquisitions in 2003, following several years without significant activity. Most deals focused on acquiring books of business and improving distribution opportunities. Life insurance companies have benefited from an upturn in the equities markets due to the many products that are equity-indexed. Most of the deals have been driven by a desire for scale and scope, such as the acquisition in 2003 of Boston-based John Hancock Financial Services by Canada’s Manulife Financial. The deal, which will make Manulife the second largest life insurer in North America, is expected to generate $259 million in cost savings over three years. Life insurers are also looking to strengthen business lines. Prudential Financial, one of America’s largest insurers, acquired the U.S. arm of Skandia, the Swedish financial services group, in order to incorporate its variable-annuity products into Prudential’s existing mutual fund and managed account operations. Most of the acquisitions in the property and casualty market have tended to be deals for books of business rather than entire companies. Although the St. Paul and Travelers merger was an exception, most property and casualty insurers remain unwilling to take on the balance-sheet risk inherent in whole-company acquisitions. As the business written in the soft market of the late 1990s works its way off balance sheets, whole-company deals could become more attractive. European Insurers Clean House:  European Insurers Clean House Many European insurance companies continue to pull back from the U.S. market after suffering massive losses in the stock market in recent years. European life insurers had moved heavily into equity investments, with stock allocations in 2000 ranging from 30 percent to 40 percent of their portfolios, with some U.K. companies even going as high as 80 percent. In contrast, most U.S. companies confined their stock allocations to around 20 percent, due to stricter regulatory limits and capital requirements. Many European insurance companies have responded by seeking to sell off their holdings abroad. In 2003, Switzerland’s Zurich Financial Services sold U.K., Dutch, French, and U.S. operations. The U.K.’s Royal & Sun Alliance sold businesses in Australia and the United States, while the Dutch-Belgian financial services group Fortis said it would divest its U.S. insurance businesses through an IPO in order to focus on its core operations in Europe. The sale of MONY, the New York-based financial services group, to AXA Financial, the U.S. arm of the French insurance company, was a notable exception to this overall trend. Large European insurers that had traditionally come to the rescue of beleaguered companies are now taking a more pragmatic approach due to financial constraints. This approach appears to be paying off. Last September, investment bank Morgan Stanley raised its outlook on the European insurance industry from “cautious” to “in-line,” mainly due to a more positive outlook for capital adequacy. Top Insurance Deals 2003:  Top Insurance Deals 2003 Asia Pacific – Chinese IPOs Improve Picture:  Asia Pacific – Chinese IPOs Improve Picture In the Asia Pacific region, such a turnaround may take longer, with capital remaining tight in many countries. However China did take a dramatic step forward in solving its capital adequacy problems with initial public offerings from two of its three largest insurers at the end of 2003. In December, China Life Insurance raised nearly $3.5 billion in its initial public offering on the New York and Hong Kong stock exchanges. Its Wall Street debut was the biggest IPO in the world in nearly two years. In November 2003, PICC Property & Casualty Co. raised more than $700 million through its Hong Kong IPO, after allowing U.S.-based AIG to purchase a 9.9 percent stake. In 2004, China’s second largest insurance company, Ping An Insurance, is expected to raise at least $1 billion in its planned Hong Kong offering. Elsewhere in the region, the outlook for investment is mixed. The Japanese life insurance industry remains weak overall. Competition by foreign investors in Japan is intense, despite the fact that outsiders represent only 5 percent of the market. However investors are still on the lookout for bargain purchases. South Korea, Asia’s second largest insurance market behind Japan, is facing increased competition due to the introduction of bancassurance, as well as ongoing solvency difficulties for a number of smaller domestic insurers, both in the life and in the property and casualty sectors. The decline of the investment markets over the last several years revealed the extent to which many insurance companies had been relying on investment returns to subsidize their core activities. As stocks recover and capital begins to return, companies will need to be smart about making investments and looking at opportunities for consolidation. Asia Pacific – Chinese IPOs Improve Picture – (contd.):  Asia Pacific – Chinese IPOs Improve Picture – (contd.) Source: Thomson Financial Services Company The Indian Industry so far…:  The Indian Industry so far… All the life companies in the private sector have used up their initial mandatory capital and in keeping with the size of their business written have introduced fresh capital. Behaviourly, there is an indication that where as in case of companies with deep pockets – both with their overseas as well as local partners – the additional capital has come in large sums, the ones at the lower rung of performance have showed a different behaviour. There is an indication, at least in case of some of these that there is a limitation on the availability of the capital. In case of Life Insurance Corporation, there will be a compliance of the required solvency margin. The capital however, is surrogated by the sovereign guarantee. The non-life companies both public as well as private sector have added / grown capital to meet the requirements. The private sector companies both will in life segment as well as non-life segment will be examining the raising of the capital at the market, as soon as they have surplus and performance to show. In the discussions which follow, we shall examine this. Slide11:  Thank you asparekh@deloitte.com (022) 2282 3915

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