Moody's: Different reasons drive Japanese and Chinese insurers' overseas acquisitions, and credit impact varies

Moody's Investors Service says that the surge in overseas acquisitions by Japanese and Chinese insurers reflects the respective dynamics of these two markets, and is raising diverging credit risks.

"Japanese insurers seek growth abroad amid stagnant operating conditions and a lack of investment opportunities at home, with life insurers focusing on yield enhancements, while non-life insurers focus on franchise expansion. They have predominantly been acquiring companies with strong ratings and leading positions in mature markets," says Sally Yim, a Moody's Senior Vice President.

"The larger size of these Japanese transactions implies that the key credit challenges will come from the potential transformation in the acquirer's franchise and a deterioration in its financial position, especially if the transaction is debt-funded," says Yim.

"Chinese insurers, with still ample growth opportunities at home, are primarily seeking diversification, and have predominantly been acquiring mid-tier players that provide long-term value creation and business growth opportunities," adds Yim.

These acquisitions are often smaller in size, thus limiting the potential credit impact, but are also of a riskier nature due to the targets' often unfamiliar markets and lines, says Moody's.

Moody's expects the credit impact of the Chinese and Japanese acquisitions to remain broadly neutral, with franchise-enhancing diversification gains and credit-friendly funding offset by integration complexity and, for some, the challenge of managing new markets and risks.

Moody's conclusions were contained in its just-released report, titled "Insurance M&As by Japanese and Chinese Insurers: Acquisition Targets and Credit Impacts Vary."

The past two years have seen a marked increase in acquisitions by Japanese and Chinese insurers of life and non-life insurance companies in the US, Europe and Asia, reflecting distinct dynamics in Japan and in China.

While the pace of expansion has slowed somewhat this year amid uncertain and volatile market conditions, the fundamental factors driving the overseas investments will remain in place, says Moody's.

In Japan, insurers face a multitude of challenges, including low interest rates, weak economic and premium growth, high asset allocations to equities and Japanese government bonds, and concentrated natural catastrophe exposures. This makes risk diversification, through expanded overseas investments, a key objective in their outbound M&A initiatives.

The experience of Japanese insurers' operating in a slow growth, low interest rate environment, and the strong market positions of the acquisition targets mitigate some of the risks associated with the rapid expansion.

While Chinese insurers benefit from far higher growth potential at home than in the US and Europe, they also face rising business pressure from high market concentration, asset risk accumulation and a rapidly evolving regulatory and financial environment.

Their overseas acquisitions should thus benefit these insurers through diversification to new markets and asset classes and continued growth in exposure in new lines of business and alternative technical knowledge.
 

Some Chinese insurance groups have also actively acquired non-insurance assets to further diversify. While this strategy can provide a good long-term hedge against insurance liabilities -- for example, property investment can provide a stable return to match long duration life insurance liabilities -- it can also raise policyholder credit risk.

For example, major property deals can imply meaningful asset concentration, are usually very illiquid, and may turn out to provide only modest returns.