M&A deals in S’pore and Hong Kong to rise

SINGAPORE: Insurers and insurance asset managers are expecting a wave of mergers and acquisitions (M&As) to rise in Singapore and Hong Kong in 2024, in line with a global consolidation trend.

According to the Clearwater Analytics Insurance Outlook Report 2024, more than 60% of the respondents in a survey expect M&A activity in their domestic market to rise in 2024.

“Expectations are high for 2024 in the insurance industry in Hong Kong and Singapore. A bottleneck of M&A activity in both markets could be set to explode,” the study said.

The optimism was felt more strongly by larger organisations that manage more than US$100bil, compared with the smaller ones with less than US$1bil in assets under management.

Clearwater Analytics, a software and data solutions provider, canvassed the views of decision-makers across 59 insurers and 23 insurance asset managers in Hong Kong and Singapore representing over US$2.5 trillion in assets under management. The survey was carried out from Oct 27 to Nov 9, 2023.

The survey showed that private equity firms have taken an increasingly positive view of the acquisition potential of insurers in Hong Kong and Singapore.

“Insurers’ investment strategies are long term, which make their portfolios attractive to private equity firms, which often feel they can generate stronger returns through diversification into alternatives,” Clearwater Analytics said.

It stressed, however, that having an operational “clean bill of health” is essential when it comes to desirability to potential acquirers. It added that taking on a firm’s assets can be extremely laborious if its systems are stuck in the dark ages.

In recent years, Singapore has seen two major deals.

In 2020, home-grown insurer Singapore Life (Singlife) merged with Aviva Singapore in a deal valued at S$3.2bil.

The deal was the largest insurance deal in Singapore and one of the largest in South-East Asia.

In September 2023, Aviva exited Singlife by selling its 25.9% stake to Sumitomo Life Insurance Company for about US$1bil in cash.Close to 30% of the insurers in Singapore and Hong Kong see meeting regulatory changes as the biggest challenge in 2024.

Tracking, preparing for, and adapting to incoming regulatory changes was cited as a significant challenge by those managing assets worth US$50bil to US$100bil, reflecting the wider range of regulations they need to comply with, the difficulty in keeping track of all the regulatory changes and making the necessary amendments to internal processes, the study said.

Other challenges include meeting internal and external reporting demands and timelines as well as meeting the various requirements in the different regimes they operate in.

Investing strategies of insurers in both cities for 2024 bear little resemblance to the traditional model which mainly focuses on publicly listed equities and high-grade fixed income.

More than 60% expect to incorporate exchange-traded funds (ETFs) into their portfolios in 2024.

ETFs are investment funds that track the performance of a specific index such as the Straits Times Index or S&P 500.

They allow insurers to gain a less risky exposure to public equity markets through the use of a passive tracker fund which outperforms actively managed funds on average, the study said.

Insurers expect to continue holding real estate and infrastructure into 2024 despite the higher interest-rate environment globally that has made fixed income an attractive asset class again.

On the high allocation to illiquid fixed assets, Clearwater Analytics said: “The high proportion of insurers holding assets that are extremely illiquid perhaps demonstrates an industry view that they can provide compelling risk-adjusted returns, and an alternate inflation hedge to fixed-income instruments.”

Other asset types favoured included private equity, money market funds, commodities and private debt.

“What all of this demonstrates is that insurers are increasingly diversifying their portfolios and pursuing more vibrant investing strategies – still with effective risk management in mind – but being more flexible in their approach and constructing a portfolio that is broader in its array of asset types,” the study said. — The Straits Times/ANN