BT Funds Research Report
Introduction
The main purpose of this report is to highlight the advantages for BT Funds to expand its services in Mexico, based on the market attractiveness.
With the help of technological advancements and growing demand of services worldwide, many organizations are going global and they are getting themselves involve in international business.
Despite the size and the nature of the company it is important to have proper strategies and plans before expanding business internationally. This report will highlight the market attractiveness of Mexico based on the facts and figures of Mexican insurance market. A proper PESTEL analysis is included in the report, giving a clear view of the Mexican market.
Country / Market Attractiveness
Despite the global economic environment, the overall Mexican insurance market continued to enjoy the benefits from the unexploited market. Due to the increase in crime rates, several earthquakes and relatively low penetration in the market have forced the locals to consider the need for insurance protection (Jones. D, 2013).
The overall Mexican Insurance Industry has been rated as a stable insurance market by a rating agency Fitch (Fitch-Mexican Insurance Outlook). With Mexican fast growing affluent population, easing credit conditions and overall rising awareness of catastrophic loss potential the overall insurance industry of Mexico experienced growth over the past 8 months. According to the top 4 insurance companies in Mexico, saw a total growth of 17% in their total written premiums (Jones. D, 2013).
The Fitch special report, entitled 2013 outlook: Mexican insurance industry, improving operating environment, gives the market a stable outlook because of the combination of its appetite for growth, conservative reserving, and increasing experience in catastrophe management.
The Mexican insurance market totaled at $16.3bn in Premium at the end of the third quarter of 2012, rating as the second biggest insurance market in Latin America after Brazil (Fitch-Mexican Insurance Outlook).
Current Environment of Mexican Insurance Market
In an attempt to be able to gain some competitive advantages, few insurers reinvented their strategies and services, focusing more on related pricing, commissions and customer rights, the basic aim for reinventing their strategies is to position themselves for growth and profitability in the local market (Jones. D, 2013).
Mexico, after Brazil in particular holds great promise for new entrants, who understand the basic nuisance of such insurance market and are willing to use technical innovation in order to be able to succeed (Leonardi. L, 2012).
PEST Analysis
With the help of Pestle Analysis of Mexico BT Funds will be able to identify various issues that affect the country’s performance through the prism of current strengths, various challenges along with future prospects and opportunities.
Political
The overall political condition of Mexico seems to be stable at present, with various new rules and regulation been implemented in last few years. The Institutional Revolutionary Party, or PRI dominated Mexico politics for 70 years (IMF, 2013).
Economic
In 2012 the GDP in Mexico was $1.16 Trillion, at $15,783 per capita, making it the 13th largest economy in the world. The economy retracted by 6% in 2009 as a result of the global economic downturn; however, in subsequent years the economy has made a gradual recovery recording average economic growth 4.9% over the past three years (Heritage 2012).
Figure 2. GDP Mexico vs. Australia (World Bank 2013)
Social
According to (Jaffary, 2009) Mexican culture is an amalgam of indigenous Mexico and three centuries of Spanish colonialism. The Mexican life expectancy has risen substantially in recent years. Mexicans are currently the longest in Latin America with an average life expectancy of 76.7 years, 2.6 years higher than the regional average.
Technological
The institute of Science and Technology was established in 2007, where the young generation is very interested in creating and selling apps for smart phones. In last few years the Mexican government has tried to put great emphasis on nanotechnology and biotechnology (Freno. R, 2007).
Competitive Market Analysis
The overall Mexican market is very well capitalized, the market have attractive stable returns over the last years and showing sound performance indicators. However, at the same time insurance contribution to the financial sector remains very low and is not growing. Due to the expanding middle class and rising disposable household income continue to boost its demand for automotive, P& C and life insurance products, as more and more people are seeking ways to safeguard their assets such as cars, homes and other personal belongings (Jones. D, 2013).
Local Service Providers in Mexico
There are various local companies in Mexico who have already capitalized on the growing demand of insurance services. Few companies to highlight are:
Grupo National Provincial – Grupo National Provincial SA is generally considered as the largest local insurance company in Mexico on based of the gross premium returns. GNP basically engages in life and non-life business, health and other automobile coverage. GNP saw its total direct written premiums grow 51.1% over the previous quarter to MEX$25.9 billion (US$2.03 billion), mainly due to the higher demand for property and casualty, medical and personal accident insurance coverage (EconomyWatch, 2010).
Another big company that holds a big market share in the Mexican insurance industry is MetLife Mexico SA. Metlife is the larget insurer in Mexico with 13.3% share of the Mexican insurance market in 2012.
In terms of life and non-life segments, Metlife written premiums were increased by more than 50% from MEX$20 billion (US$1.57 billion) in the second quarter of 2012 to MEX$30.35 billion (US$2.38 billion) (ImF, 2013).
In 2012, both Brazilian and Mexican insurance companies continued to dominate the overall Latin America insurance industry as a whole. In 2012, Porto Seguro SA reported that its net written premiums, in terms of life and non-life segments grew 8.07% from R$8.56 billion (US$4.34 billion) in 2011 to R$9.63 billion (US$4.88 billion).
Another bank-affiliated insurance company Seguros Inbursa was the fifth largest insurance company in Mexico in terms of total written premiums, with a 5.66% share of the Mexican insurance market in 2012. Its net income grew by nearly 22.7% from the second quarter of 2012 to MEX$1.01 billion (US$79.15 million) for the third quarter of 2012, (Jones. D, 2013)
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The Mexican market at present is dominated by 10 companies in the life sector and by other 16 in the nonlife sector accounting for over 80 percent in both cases. The dominance of the insurers with foreign capital is very strong in the life sector, where only 12 percent market share corresponds to national insurers in the Mexican market. The nonlife market share distribution is closer to a 30 to 70 percent in favor of foreign owned insurers (IMF, 2013).
Why BT funds would be successful in Mexico
At present the BT – Financial group has $35.4 billion funds under management, the present amount funds represents 1.3% of the $2.7 trillion dollar investment market. By expanding the operations in Mexican market it will increase the level of total funds managed by BT financial (BT- Financial 2012).
- Figure 2. GDP Mexico vs. Australia (World Bank 2013)
Another important reason for expanding the BT operations in the Mexican market is mainly because of the reason that Mexican banking sector is strong. IMF, (2013). More and more foreign banks are entering the Mexican market mainly because of the high profit rates and the growing demand of insurance policies. A notable example is the recent acquisition of Banamex by Citigroup and the Spanish allied Bancomer. Many foreign run affiliates are involved in retirement-fund administration and mutual fund management (AEGON 2009, IMF 2013).
According to Fitch special report, entitled 2013 outlook: The Mexican insurance industry provides a stable outlook to its market because of the combination of its appetite for growth.
Mexican insurance industry totaled $16.3bn in premium at the end of the third quarter of 2012, making it the second biggest market in Latin America after Brazil. However the overall the insurance penetration in Mexican market is still low at 1.82%, that’s been indicated by Fitch as indicating room for ample growth.
Important factor to note is that in 2012 only 30% of the countries cars have insurance and only 5% have some sort of property and casualty insurance protecting against natural disasters. Premiums that were written across all lines of insurance grew an aggregate 14.7% in nominal terms in the first three quarters of 2012, compared with the same period in 2011.
Complexity of Mexican Market
In a country like Mexico, establishing foreign subsidiaries can only perform foreign investment in insurance and surety businesses.
For any foreign insurer to be able to apply for a license to operate in Mexico has to provide, among other information, a confirmation from the home supervisory authority to the CNSF. Such confirmation should and must state that the insurer is authorized by the government to carry out the lines of insurance business proposed.
In Mexico, insurance legislation clearly highlight the fact that the same institution cannot acquire a license to perform both life and nonlife business lines. This legislation has to be taken into consideration by BT Funds. For insurance undertakings licensed prior to this legal provision (introduced in 2002), regulation establishes that risks and accounting must be handled separately (IMF, 2013).
Market Entry Strategy
The decision of entering any foreign market is a very key decision for any organization, regardless of the nature of the industry the business operating in, firms face a very critical decision in choosing the best market entry mode. There are various options available for any organization to consider entering in any foreign markets, such as:
Direct and Indirect Exporting,
Franchising,
Licensing,
Mergers or Acquisition,
Strategic alliance.
With respect to the nature of the business and the industry BT Funds will be entering, the best option available for BT Funds to enter in Mexican Insurance market would be through cooperation strategies.
The overall activity of Merger and Acquisition in the Latin American region has showed no signs of slowing down over the past 9 months, with the help of low market penetration rate and a growing middle class population and most importantly an increasing number of property and car buyers throughout the region the insurance sector is at boom
Jones. D, 2013 et al
Over the last few years many insurance and investors swooped in Latin America insurance industry for acquisitions. Few of the examples to consider are
- Australia’s QBE (ASX: QBE), which completed its acquisition of HSBC’s Argentine Holdings SA in May 2012. This merger and acquisition deal included a ten-year bancassurance agreement enabling QBE to become one of the exclusive providers of general insurance products to HSBC customers in Latin America region.
- Another major example of merger can be considered of UK – based, RSA insurance group Plc, the company completed the double acquisition of Aseguradora de Creditos and El Comercio Compania, the price of such merger is not disclosed yet. The major reason for such deal is to be able to attempt to generate opportunities and improve efficiencies and profitability.
Though there are examples of mergers activities taking place in the Latin America Insurance industry, still for BT – Funds the suggested opinion would be through cooperation strategies.
