Fitch: Japanese Insurers' Overseas Acquisitions Credit Positive
MYL has become the latest Japanese insurer to make a major overseas acquisition, with the 24 July announcement that it would pay USD5bn (JPY625bn) for Oregon-based Stancorp Financial. The MYL-Stancorp announcement comes just over a month after Tokio Marine and Dai-Ichi Life announced their own multi-billion dollar acquisitions of other US insurers. Notably, Japan's largest life insurer, Nippon Life, has also stated that it plans to expand overseas, including majority stakes in foreign companies for the first time. MYL has indicated that it would continue to consider other overseas acquisition opportunities following its deal with Stancorp.
Overseas acquisitions have become a key long-term business strategy for major Japanese insurers, with low domestic growth rates linked to aging demographics. The recently announced acquisitions will have a positive effect on long-term growth and earnings diversification. Tokio Marine is likely to boost its overseas insurance premiums and business unit profit to about 38% and 46%, respectively, of group revenue from its HCC acquisition, up from 32% and 38%. MYL will see the premium income contribution from overseas businesses rise to 13% after it completes the purchase of Stancorp.
The recently announced deals are among the largest foreign acquisitions by Japanese insurers ever undertaken. However, it is important to note that each of the deals is manageable when measured against equity, and that none of the firms are expected to take on substantial new leverage to finance the purchases. MYL's JPY626bn purchase of Stancorp is measured against adjusted equity of JPY5trn, while Tokio Marine has equity of JPY1.50trn and cash and equivalents of JPY1trn versus the HCC purchase price of around JPY940bn. Dai-Ichi life plans to issue around JPY250bn of common equity to help fund its JPY582bn acquisition of Protective Life.
Operational integration of the acquired businesses, and ensuring appropriate risk management - especially for non-life businesses - will be crucial for maximising the benefits from the acquisitions. But there will be operational risks. Notably, this is MYL's first major overseas acquisition, and this could prove challenging for management. Tokio Marine has a longer history of overseas operations, while Dai-ichi has successfully integrated Australian insurer TAL.
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