New paid-up capital requirements to drive mergers and acquisitions in the Philippine insurance sector

The Philippine insurance market appears ripe for consolidation, with some 86 life, non-life and composite insurance firms in operation at end-2018. In an effort to strengthen the sector, the Insurance Commission (IC) is incrementally raising the sector standards, adopting the latest financial reporting standards and increasing risk-based capital requirements. Implementing new requisites has already caused some mergers and drop-outs in the market, with more forecast in the years ahead.

Stepping Up 

In August 2013 Republic Act No. 10607, also known as the Amended Insurance Code, came into effect, updating the country’s insurance regulations. Under the terms, new domestic entrants were required to have P1bn ($18.6m) or more in paid-up capital, while existing players had to have a minimum net worth of P250m ($4.7m) by end-2013, rising to P550m ($10.2m) at the end of 2016 and P900m ($16.7m) by end-2019.

A further, final increase is scheduled for 2022, with a minimum of P1.3bn ($24.2m) required by the end of that year. While the IC had the discretionary power to raise minimum capital requirements prior to the amendment, the recent global shift towards more robust capital regimes and solvency frameworks gave the impetus for the amendment’s more formal approach. “The previous requirements were too modest,” Peter Grimes, CEO of FWD Life, told OBG. “The capital requirements in the new code will ensure the system is more resilient in the event of economic shocks.” Nevertheless, the changes will have little impact on larger companies that can easily meet the capital requirements. “The P900m ($16.7m) level will not make any difference to the top-10 insurance companies, which control well over 80% of the market,” Renato Vergel de Dios, CEO of BDO Life Insurance, told OBG.

However, smaller firms have found it more difficult to meet the new requirements, especially for small, family-run businesses in the non-life segment. As of March 2019, six firms in the non-life segment had exited the market after failing to meet the end-2016 requirement of P550m ($10.2m) and entered into stewardship, meaning they cannot conduct new business. The aim is that they will eventually return to the market with the necessary capital requirement, or be merged into other outfits. This would follow a global trend, with the first half of 2018 seeing the most mergers in the insurance sector, worldwide, since the 2007-08 global financial crisis. Speaking in March 2018, the commissioner of the IC, Dennis Funa, remarked that these companies were not being taken out of the market for making a loss – indeed, they were all profitable – but because of their failure to meet capital requirements. By the end of the 2016-18 licence period, the IC’s figures showed only 13 companies had paid-up capital that met the P550m ($10.2m) requirement.

Change Ahead 

With 2019 seeing the minimum requirement increase yet again, the likelihood is that more companies will fail to meet the standard, with further stewardships and mergers a strong possibility. Indeed, figures from the IC show that by the end of the 2016-18 licence period, only four companies – Standard Insurance, Starr International, AIG Philippines and PNB General Insurers – had paid-up capital of more than P900m ($16.7m). At the same time, larger investors, particularly foreign ones, are waiting to see which companies are left standing by the escalating capital requirements. “International players are likely to wait until firms are required to reach the P1.3bn ($24.2m) level,” George Florendo, deputy commissioner of the IC, told OBG. “At that point only the more economically viable insurers will remain in the market,” he said. Other sector players agree that acquisition activity is likely to be concentrated among medium-sized and larger players. “It is not profitable for big firms to merge with smaller companies. Their acquisition would be more expensive than an expansion of their own networks,” Rizalina Mantaring, chairman of Sun Life Financial Philippine Holding, told OBG. “Organic growth is more convenient than integrating the operations of small firms.”