Consultant: AIA-Prudential Combination Would Overtake HSBC as Life Leader in Hong Kong

The proposed Prudential plc [085925] acquisition of American International Group's [058702] Asia-Pacific life insurance operations would create an entity that would overtake HSBC as Hong Kong's leading life insurer, according to an industry analyst.

Hong Kong-based Sharon Khor, head of insurance for greater China, at consultancy Accenture, told BestWire that if the deal wins regulatory approval, the combined businesses of AIA Group Ltd. and Prudential Hong Kong will "become the largest life insurer in Hong Kong by gross written premium, exceeding the market leader HSBC in the city."

Khor said the transaction will strengthen Prudential's position in emerging markets, where it currently "doesn't have a strong presence."

AIG announced a deal to sell AIA to Prudential for US$35.5 billion. The deal will involve payment of $25 billion in cash, $8.5 billion in face value of equity and equity-linked securities and $2 billion in face value of Prudential preferred stock.

According to AIG, the transaction is expected to close by the end of 2010 and is subject to approval by Prudential shareholders, regulatory approvals, and customary closing conditions.

Khor said the deal will mean "access to capital markets will be further restricted for smaller players, which may eventually lead to further consolidation, or mergers and acquisitions" in the Asian insurance market.

"Consolidation of the risk pool may also have an impact on the regional insurance market," she added.

Because AIA is "rather strong" in alternative distribution, Khor said she believes the transaction will complement Prudential's current agency-dominant distribution landscape, which will lead to "lowering the general acquisition cost in the region."

The consultant also expects that "product rationalization" across the region may affect pricing and portfolio management strategies.

Khor said the combination will strengthen the position of the combined businesses in emerging markets like China and India, "especially in China as Prudential is currently a joint venture there."

There will be more potential cross-sales leveraging opportunities across the customer base for the two businesses, while the transaction may also generate "regulatory impact," noted Khor.

Market Potential

Foreign insurers are eager to expand their operations in Asia or to enter new markets in the region. Accenture said the economies of the Asia-Pacific region have been quickest to recover from the global financial crisis, and developed domestic markets for multinational insurers are saturated. The consultancy said emerging markets can "provide new sources of revenue."

Insurance penetration [premiums as a percentage of gross domestic product] in both life and property/casualty sectors are relatively low in most parts of Asia. "There's plenty of room for growth," said Khor. Life insurance penetration across Asia was 4.4% in 2009, according to a Swiss Re sigma report. That is in line with the world average of 4%.

But within Asia, life penetration varies widely, from Taiwan's 13.3% and Hong Kong's 9.9% to China's 2.2% and Vietnam's 0.7%. In Prudential's home country of the United Kingdom, the life penetration rate was 12.8% last year.

She added that "Asians traditionally have the highest savings rate compared to their western counterparts, so wealth management is probably more viable in this market."

According to Khor, major foreign insurers in the region include ING Group [085144], Allianz S.E. [055288], Axa S.A. [085085], Manulife [066866], AIA/Prudential [pending acquisition]. HSBC [086812] and Aviva plc [051984] will "continue to be sizable multinational corporation players in the region."

In terms of products, these insurers will focus on wealth management, pensions and health. In terms of services, the trend may be toward "more centralized" shared services hubs in lower-cost locations in the region, said the consultant.

"Sales channels are likely to see a bigger role for alternative distribution, especially direct marketing or telemarketing, without undermining the importance of bancassurance in certain growth markets, such as Indonesia and India," added Khor.

For market growth prospects, Accenture expects that "there will be around 10% to 15% growth in Asia; while for China and India, we are still looking at over 20% compound annual growth rate in the next few years."

(By Rebecca Ng, Hong Kong news editor: [email protected])