Mergers, acquisitions in PH non-life insurance sector seen ahead of 2022 net worth hike | Inquirer Business
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Mergers, acquisitions in PH non-life insurance sector seen ahead of 2022 net worth hike

By: - Reporter / @bendeveraINQ
/ 03:54 PM March 11, 2022

Insurance

MANILA, Philippines—While the Philippines’ non-life insurance players are en route to growth this year alongside economic recovery, the mandatory increase in net worth by end-2022 will burden small insurers more, forcing them to merge or consolidate, global insurance credit rating agency AM Best said.

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In a March 10 report, AM Best kept its stable outlook for the non-life sector as “premium growth is expected to be back on track, in line with a rebound of gross domestic product (GDP) growth prospects.”

The government targets 7 to 9 percent growth this year following last year’s better-than-expected 5.6-percent expansion, which reversed the record 9.6-percent GDP contraction in 2020 due to the most stringent lockdowns imposed at the onset of the pandemic.

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“Non-life premiums showed signs of recovery in 2021 after they fell sharply in 2020 as a result of the COVID-19 pandemic. Prior to the pandemic, the Philippine non-life insurance segment exhibited one of the highest five-year average compound growth rates in Southeast Asia; it is expected to be back on track as the economic environment improves,” AM Best said.

Another growth driver for non-life insurers was the “Build, Build, Build” infrastructure program, which AM Best said would “act as a catalyst to the long-term growth of the property, construction and engineering insurance segments.”

Micro-insurance, an area where the Philippines leads in the region, would also bolster the non-life sector’s growth as cheap insurance products were accessible to more consumers, AM Best said.

However, as in previous years, AM Best flagged downside risks from the Philippines’ significant exposure to natural catastrophes, owing to its geographic location where strong typhoons regularly pass through, and in the so-called “Ring of Fire” prone to earthquakes and volcanic eruptions.

The forthcoming industry-wide increase in minimum company net worth to P1.3 billion before 2022 ends from the current P900 million was also a concern, AM Best said.

Citing a Senate bill which was aimed at stopping the implementation of this year’s net-worth hike under the Amended Insurance Code, AM Best said that the Philippines, by end-2022, “would have a higher capitalization requirement than many of the more established insurance markets in the region, considering the size of its own market.”

“Since December 2019, Philippine insurers have improved their capital levels, recording a 10-percent increase as of September 2021, despite depressed sales due to COVID-19 in 2020,” AM Best said.

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“As a result, more than 25 percent of non-life companies had already reached P1.3 billion in net worth as of December 2020,” the rating agency said.

“However, unless the proposed bill is approved, AM Best continues to believe that additional fundraising actions and consolidation transactions among the mid-tier non-life companies will be key for the remaining insurers to meet the [higher] capital requirement by the stipulated deadline,” it said.

“As well as being expected to put a strain on the finances of small to mid-sized insurers, the elevated capital requirement may also lead to several players giving up their licence, given their typically niche business segments and very small premium bases,” AM Best said.

“It may be unattractive for stakeholders to add capital to small players to meet the capital requirement while those companies experience pressure on underwriting growth and profitability (in addition to the challenges of process improvements and digitalization initiatives),” it said.

“However, large insurers may have the upper hand, as management teams will not need to spend time on capital raising or M&A [merger and acquisition] activity in order to come into line with the new requirement,” AM Best said.

“AM Best believes that the increase in minimum net-worth requirement is likely to strengthen the industry’s combined capital position and consolidate the segment’s presently fragmented landscape,” it said.

“However, over the near term, a further increase in [net worth] may pose an extra burden on some small to medium-sized insurers, given the large gap between their current capital bases and the higher minimum net-worth requirement,” it added.

AM Best also flagged potential tariff rate removal on non-life players’ fire and motor businesses, which it said “may impact insurers’ profitability if pricing competition intensifies.”

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TAGS: Business, capitalization, economy, Insurance, insurance credit rating agency, non-life insurance
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