Asia awaits rash of life insurer IPOs

MUMBAI/SEOUL (Reuters) - Investors in Asia, who currently have few options among insurance stocks, may soon be spoiled for choice as several life underwriters prepare initial public offerings that could raise billions of dollars.

The IPO hopefuls include what would be the first listed life insurers in India and South Korea.

Looming largest in the pipeline is AIA, the Asian arm of American International Group (AIG.N), which plans a Hong Kong IPO in the first half of 2010 to raise roughly $4 billion after its troubled parent failed to find a buyer for the unit.

Shanghai-listed China Pacific Insurance 601602.SS, meanwhile, aims to raise $3.5 billion in Hong Kong by early 2010.

The potential wave of issuance comes as IPOs make a comeback around Asia and as rising stock markets lift earnings for life insurers, for whom investment returns are a key source of income. The need for capital to fund expansion is another driver.

"There's a lot of pent-up demand for capital, as insurers need to raise capital to fund growth and meet new risk-based capital requirements," said Chin Yee-Png, co-head of the Asia financial institutions group at UBS (UBSN.VX).

UBS is among the investment banks, along with China International Capital Corp (CICC), Credit Suisse (CSGN.VX) and Goldman Sachs (GS.N), helping China Pacific, the country's No.3 life insurer, to revive an overseas share sale that had been shelved earlier due to weak markets.

SCARCITY, GROWTH

Scarcity value is expected to drive investor interest in a sector that is a proxy for the growth of the middle class.

Asia is home to just a handful of big listed insurers, led by China Life Insurance (2628.HK)(LFC.N)(601628.SS) and rival Ping An Insurance (2318.HK)(601318.SS), the world's two most valuable life insurers, and Taiwan's Cathay Financial Holdings (2882.TW).

"There's no way of playing the Indian insurance story today, so I think there's going to be very strong demand. This is part of a broader regional trend," said Rob Jesudason, Asia head of the financial institutions group at Credit Suisse.

"There are potentially 5-10 very large insurance IPOs across the region approaching the market," he said.

Esther Chwei, a portfolio analyst covering insurance and banking at fund manager RCM, a unit of Allianz Global Investors, said China and India, with fast-growing economies and low insurance penetration rates, are especially attractive.

Life insurance penetration in India is about 4 percent of GDP, in terms of total premiums underwritten in a year, compared with 2.4 percent in China and about 13.5 percent in the UK.

"For China and India, once people get wealthier and have financial obligations, the demand for protection policies will increase," said Chwei, whose firm manages $11 billion in the Asia-Pacific region.

SOUTH KOREA'S FIRST

Tong Yang Life Insurance Co Ltd is on track to be the first to test public appetite for the sector in South Korea, with plans to raise up to 440 billion won ($353 million) in an IPO this month. Credit Suisse and Morgan Stanley (MS.N) are among several firms managing the deal.

Demand for fresh capital to bolster insolvency margins had spurred market talk of a string of Korean life insurer IPOs. But many are units of the country's industrial conglomerates and have secured new capital from their parents, so are in no rush to offer new shares, especially if they might struggle to get the price they want.

South Korea's 73 trillion won ($59.25 billion) life insurance landscape by premium income is divided between three market leaders - Samsung Life, Korea Life and Kyobo Life - and 19 smaller companies such as Tong Yang, Kumho and Mirae Asset.

Korea Life, which has annual premium income of about 10.5 trillion won, is the likeliest to follow Tong Yang with an IPO.

"There is a high likelihood we would proceed for an IPO in the first or second quarter of next year, if market conditions allow," said a spokesman for Hanwha Group, the securities to chemicals conglomerate that owns Korea Life.

Kyobo Life's chief said last year it could take 2-3 years before it goes to the market, citing poor market conditions.

INDIA SOON?

India's young and fragmented private life insurance sector is ripe for listings given the capital needed to fund growth, though regulatory issues need to be resolved, including the question of when foreign partners can lift their holdings to 49 percent from 26 percent.

India's private insurers, which were growing rapidly until last year's market meltdown, are all less than 10 years old and prevented from listing until they have been in business for at least a decade.

Reliance Life Insurance has asked for a waiver so it can list, and industry insiders say an IPO is possible within a year.

India's first foreign-backed joint ventures -- between ICICI Bank (ICBK.BO) and Prudential Plc (PRU.L), Max India (MAXI.BO) and New York Life, and Housing Development Finance Corp (HDFC.BO) and Standard Life (SL.L) -- all will have their 10th birthdays next year and are said by insiders to be eyeing IPOs.

Super Japan Typhoon Could Cause An $18 Billion Insured Loss

With the typhoon season in full swing, a catastrophe modeling firm estimated Japan would sustain an insured loss of more than $18 billion if the 1959 Super Typhoon Vera hit today.

Newark, Calif.-based Risk Management Solutions said wind damage alone from a repeat of that storm’s blow to the island’s southern coast could hit the $18 billion mark.

The estimated insured losses from wind damage could range from between $14.5 billion and $18 billion for residential, commercial and industrial properties, RMS said in a report.

Typhoon Vera, also known as Typhoon Isewan, made landfall on Sept. 26, 1959, impacting nearly all of Japan due to the strength and extent of its wind field and storm surge footprint, according to RMS.

Recounting the damage then, the firm said that much of the low-lying land around Japan’s Ise Bay was inundated with flood waters, which persisted in some areas for more than four months.

Vera destroyed thousands of homes, leaving more than 5,000 people dead and injuring an additional 39,000 individuals. It is the deadliest typhoon to strike Japan in recent history and ranks among the highest number of casualties from Japanese natural disasters in the 20th century, RMS related.

Insurance played a minimal role in aiding recovery efforts from the 1959 storm, said RMS, whereas a considerable portion of total losses today would be covered by the insurance industry.

RMS noted that the significance of Super Typhoon Vera is such that the Japanese Financial Services Agency (FSA) specifies that insurers providing coverage in Japan must use the Super Typhoon Vera event to assess their solvency levels.

Using an advanced flood simulation developed by the Japanese government, RMS said in the research report that storm surge damage from the worst-case scenario in Ise Bay would overwhelm the region, severely damaging exposed properties as well as disrupting the transportation networks, harbor functions and other infrastructure built in the region since the 1959 storm.

“In today’s Japanese insurance market, storm surge damage is included as an extension to wind coverage for residential and commercial lines of business,” commented Domenico del Re, director of product management at RMS.

He said a simulation of the 1959 typhoon event shows that losses from storm surge damage to residential properties could add up to $6 billion to the catastrophic wind losses.

While the extent of storm surge flooding in a recurrence of Vera would be significantly reduced by the existing flood defenses, the continuing issue of potentially higher sea levels due to climate change increases the threat of storm surge damage in Ise Bay, as well as other bays in Japan, RMS reported.

Insured property losses caused by wind damage are based on the RMS Japan Typhoon Model. 

Casualty Insurance

Casualty insurance is typically combined with property insurance and often referred to as “property and casualty” insurance. However, there is a difference in the type of coverage. This is especially true after the events on September 11, 2001 and the hurricanes in 2004-2005.

Property insurance insures the location of the business while casualty insurance insures the business.

For example, if your business is on the seventh floor of a building and a natural disaster, such as a flood, occurs that wipes out the first floor, but causes no damage to the seventh floor, then any loss would not be covered by your property insurance because there is no direct loss to the location of the business. However, if you have business continuation or business interruption insurance you may have coverage for the indirect loss to your business.

Many of these products are developing in today’s world. Insurers are making it necessary to carry additional casualty insurance to cover certain types of losses. These types of coverage include:

• Terrorism Coverage –

  Acts of terrorism or war are not covered by traditional insurance policies – or, so claims the insurers. The attacks on September 11, 2001, resulted in claims exceeding $30 billion. Insurers now specifically exclude terrorism and require the purchase of a terrorism policy.

• Flood Insurance –

  Floods are generally not covered by typical property insurance policies and a separate flood insurance policy is necessary to protect against that risk.

• Political Risk or Government Liability –

  If you do business overseas or have substantial government contracts, then you may want to look into this type of coverage. It protects against a sudden loss due to a sudden political change in a country or withdrawal of a contract without recourse.

• Other Types –

  There are other types of casualty insurance that seem to be developed in response to the latest news: Cyber-Liability, Identity Theft, Cyber-Fraud, Employee Theft, etcetera.

Some of these casualty policies may be critical for the safe operation of your business. More often though, standard casualty coverage offered with a business owners’ policy will be enough casualty coverage and these types of policies are ‘flavors of the month.’

Casualty insurance also includes certain types of bonds or other limited insurance that have been long standing products and may be very necessary to your business.

• Employee Theft and Dishonesty –

  This coverage protects your business from loss or damage caused by employee theft. If your employees have access to company funds or handle cash transactions you may want to consider this coverage for the employees.

• Surety Bonds –

  This form of casualty coverage referred to as a bond insures someone you will contract with that you will complete the contract. If you are in construction or plan on bidding for government jobs, then you will be required to obtain a surety bond to insure your work.

  Casualty insurance is a different type of insurance than property insurance. We will review different forms of casualty insurance and how these can work within your business plan.

Property Insurance

Property insurance insures your business against loss or damage to the location of the business and to its contents. It will also insure against loss or damage to contents under your control. Finally, if your business rents or leases a location or travels to other physical locations, then your business will be required by the property owner to carry property insurance by the terms of the lease or contract.

The more kinds of loss the policy covers, the higher the premium. Property insurance comes in two forms:

• Broad Form – This type of policy identifies a number of different types of disasters and covers against loss from all identified causes in the policy.
  
  
• Single or Specific Peril – This type of policy insures against loss only from the identified peril. This is typically a separate fire policy. However, other single perils can be insured against, for example, terrorism.
  
  

For most small businesses, a broad form property insurance policy is included in a packaged policy known as the “business owners’ policy” and will be the best coverage for the premium dollar. Some businesses, however, either because of specific risks or unusually high risk, may not be eligible for such a package. In that case, several specific peril policies may need to priced and examined.

Property insurance policies can be modified:

• Endorsements – Endorsements add increased coverage or identify other business locations that are covered. This can include a customer’s location, for example, if your business is working at their location. Endorsements are a big benefit for your business and can be added, typically by a phone call, to a policy relatively easily if you have a good insurance professional.
  
  
• Exclusions – Exclusions take away coverage. Your insurance professional or insurer will tell you that property policies are “always” written with the “such-and-such” exclusion. Exclusions are the business insurance purchaser’s worst enemy. The most recent example is after the hurricanes in 2004-2005. Many insurers claimed that the exclusion in their policies for “wind” damage excluded much of the damage from coverage. Regardless of what an insurer tells you: exclusions take away coverage.
  
  
• Schedules – Schedules are lists of covered locations and property. These must be updated regularly and at any time a location or major covered equipment changes or is purchased. Good insurance professionals will contact you on a regular basis to discuss updating scheduled locations and equipment. If a location or piece of equipment is not a “scheduled” location or content, there is a possibility that a claim could be denied on that basis.
  
  

Property insurance can pay damages or loss based on one of two ways:

• Actual Cash Value (or, ACV) – Actual cash value means that your loss or damage is valued at the value of the property loss. Sounds fair. But, if a $100,000 car lift in your garage has been depreciated over a five-year period it may be found to have an ACV of $20,000 at the time of loss. You can’t purchase a new lift for $20,000.
  
  
• Replacement Value – Replacement value means that you are reimbursed the actual amount necessary to replace the equipment when it is lost. In the example above, if the new lift costs $120,000 to replace, then you get a new lift for $120,000.
  
  

  Replacement value coverage typically carries higher premiums.

  All of the above elements must be considered when reviewing and comparing property insurance for your business. A comparison made only on the premiums ignores critical aspects of the policy.

Types of Business Insurance

Business insurance is a broad description that can be broken down into a list of nine types of insurance policies and here I will briefly explain the coverage and expand on these as individual topics