Insurance executives discount major M&A wave

Mexico's insurance industry will likely see a steady flow of companies exiting and entering the business in the next few years rather than a big wave of mergers and acquisitions, insurance executives told BNamericas. The number of insurance companies operating in Mexico grew from 38 when the North American Free Trade Agreement (Nafta) took effect on January 1, 1994, to 65 at the end of last year. "At face value 65 companies sounds like a lot, but if we break it down there are many specialized companies," Luis Huerta, CEO of life insurer Seguros Argos, said. "Yes, we may see some consolidations among companies that had certain expectations that weren't met, but I wouldn't say there are too many players." Written premiums in Mexico's insurance industry rose 12.7% to 33.9bn pesos (US$2.97bn) in the first quarter, with insurance association AMIS projecting full year premium growth of 8%. "Given the level of penetration of insurance I think there is room for 65 insurance companies," Seguros Monterrey New York Life marketing and strategic planning director Raúl Ávila said. Indeed, premiums represent only 1.6-18.% of GDP in Mexico, compared to an average of 4.8% worldwide. That growth potential has attracted both foreign and local players alike. Seguros Argos opened its doors in October 2002 with a focus on selling life products to the non traditional markets of the lower and lower middle classes. Argos plans to turn a profit on premiums of 1bn pesos in 2004, its second full year of operations. Likewise, Seguros Azteca, part of the retail and financial empire of Mexican businessman Ricardo Salinas, started operations last year with low income households as its target market. Texas-based American National Insurance Company (Nasdaq: ANAT) opened a life insurance subsidiary in Mexico five years ago. Even though American National México is still in the red, American National senior executive president Jim Pozzi recently told BNamericas that he is confident the company will become a viable operation in the future. "I think small companies that can't develop a critical mass of financial advisors and competitive products are going to end up being acquired, merging or disappearing. But it is a natural process. I personally don't see any intentional consolidation process," Ávila said. And that is precisely what has happened to some big foreign names like Reliance, CP Direct, Hartford and Kemper that entered Mexico with high expectations, but for one reason or another decided to pull out. "What we have seen in the last 14 years is many [foreign companies] opening and many leaving because they thought business would be easier than it turned out to be or they couldn't meet their expectations. Some have entered some have left and I think that will continue to happen," Huerta said. However, the days of big multi-million dollar takeovers like New York Life's acquisition of Seguros Monterrey for US$570mn in 2000 and Metlife's 9.2bn-peso bid for Aseguradora Hidalgo in 2002 are probably a thing of the past. Risk-averse international investors who are still smarting from 9/11 and the industry downturn a few years ago are unlikely to put big money like that into Mexico anytime soon. "I don't see there being foreign investors willing to take aggressive or adventurous positions in local companies. But the local companies that have the muscle already have important market shares," Allianz Mexico CEO Sergio Ghibellini said. Mexico's biggest domestic insurance companies GNP and Seguros Inbursa commanded market shares of 14% and 5.9%, respectively, at the end of 1Q04. In a May interview with local press, Inbursa group investor relations director Frank Aguado hinted that the insurance company might buy out smaller foreign insurers eager to exit Mexico. While international players like Allianz and Royal & Sun Alliance have divested certain assets in the region in the last year, neither company has indicated it wants to pull out of Mexico where they hold small but respectable market shares. Only time will tell if Mexico's foreign insurers' club continues to shrink, but given the absence of international investor interest and the size of the top Mexican insurers, M&A activity will likely be a local, small scale affair at least in the short term.