The day after Hong Kong was hit by Typhoon Hato (Japanese for pigeon), property and casualty heavyweight MS&AD Insurance made a hefty bet on a fire-to-marine insurance broker with exposure in the territory.
For Tokyo-headquartered MS&AD, hurricanes and earthquakes are part of the day job. But its latest acquisition shows it clearly wants to de-risk its Southeast Asian strategy.
Mitsui Sumitomo Insurance, a unit of MS&AD, said on Thursday it plans to buy First Capital Insurance for $1.6 billion (¥174.4 billion) in cash.
First Capital looks like a relatively safe play. It is profitable with a five-year average combined ratio of 76% and return on equity of 15%.
The Singapore-headquartered company is also focused on commercial insurance, which is relatively predictable, and profitable. In contrast insuring individuals tends to be competitive, expensive to originate and claims are high.
Japanese non-life insurance companies have been buying overseas specialty insurers, in part to diversify their risk exposure, which tends to be skewed towards natural disasters in Japan and weighted towards investments. They also need to diversify product offerings, and to acquire underwriting expertise.
First Capital writes non-life insurance business across fire, engineering, marine hull, marine cargo and other accident areas.
The deal also shores up MS&AD’s No. 1 market share in the fast-growing Association of Southeast Asian Nations (Asean) region by premiums written and gives it a roughly 15% market share in Singapore. First Capital is the largest P&C insurance company in Singapore in terms of gross written premiums. It also has exposure to commercial businesses in Hong Kong and India.
Japan’s shrinking population threatens to reduce the number of new insurance policies written by life and non-life insurers alike.
First Capital will contribute around ¥3.7 billion to full year 2019 net profit, assuming 10% growth and a goodwill amortisation period of 20 years, say Credit Suisse analysts.
More broadly, Japanese P&C insurers are looking to improve capital efficiency partly by selling shareholdings in domestic business to create surplus cash and then using this for overseas M&A and dividends.
For all this MS&AD was prepared to pay up.
MS&AD, one of the largest Japanese P&C insurers paid roughly 3.3 times book value as of June 30 and 25 times 2016 earnings, a punchy valuation.
“MS&AD saw First Capital as a once-in-a-lifetime acquisition that they had to have,” a person familiar with the deal said.
MS&AD also had to see off a rival bidder for First Capital: cross-town rival Tokio Marine, the person added.
Pivot
The deal also showcases a more assertive and confident MS&AD overseas.
MS&AD bought a 50% stake in the life-insurance unit of Indonesia’s Sinar Mas for about ¥67 billion in 2011 and paid a whopping price-to-book ratio of 4.7 times (as of December 2010) for the priviledge. The deal represented a price to earnings multiple of 13 times, all prior to the capital injection.
The Japanese insurer also bought a small stake in India’s Max Life Insurance in 2012; and a minority stake in Hong Leong Assurance in 2010.
These deals came at a time of almost fevered interest in Asian insurers. In one comparable deal Zurich-headquartered ACE paid a high multiple to buy PT Asuransi Jaya Proteksi in Indonesia for $130 million in cash which sold personal lines in property, motor, accident and health insurance as well as commercial insurance coverages such as marine cargo and liability insurance.
Since those heady days MS&AD has focused on acquiring control of overseas companies in more developed markets and deals with clearer goals.
In 2015 it agreed to buy British reinsurer Amlin for $5.3 billion.
Earlier this month, it also bought a stake in Australia's Challenger.
While MS&AD’s decision on August 15 to buy a 6.3% stake in Australia’s largest annuities provider may look like regression, the deal does have a neat angle.
The market for Australian dollar-denominated annuities is bigger in Japan than Australia so now Challenger will be able to distribute this product over MS&AD’s network. Challenger expects its business to grow so much from this new sales avenue that it will need more capital, which it will receive from MS&AD’s stake purchase.
Citigroup advised MS&AD while BofA Merrill Lynch acted as exclusive financial advisor to Fairfax.
