Dah Sing’s auction of its insurance operations has attracted a wide range of suitors but a clampdown on mainland Chinese citizens buying policies in Hong Kong is making some of them nervous, according to two people familiar with the matter.
Dah Sing, a diversified financial services group, said on January 12 that it was in the early stages of exploring strategic alternatives for its life assurance business and its bank’s life insurance product offerings.
The Hong Kong financial services group’s clever structuring of its $1 billion auction attracted initial interest from over 20 companies including Guangdong-based property developer Country Garden and Hong Kong-headquartered AIA, according to another person familiar with the matter. First-round bids are due this week.
However, some potential suitors are now showing signs of wavering, sources familiar with the matter said, as China steps its efforts to stem capital outflows.
In recent weeks that has included more rigorous enforcement of rules capping the amount of insurance that mainland China's citizens can take out in Hong Kong, which can be a relatively simple way of transferring money out of the country. Previously insurance companies had been lax about sticking to the cap of $5,000 per transaction for buying policies.
The insurance companies are not just offering long-term protection for health and property but also short-term wealth management products, which many mainland Chinese have found convenient for parking money offshore.
Strong early interest
Several factors ensured widespread initial interest in the Dah Sing auction. The first is the relative scarcity of such insurance assets for sale in Hong Kong.
Insurance sales in Hong Kong depend heavily on both agency salesmen going door-to-door and sales via bank networks, a route known as bancassurance. “It’s hard to stand on one leg,” said one insurance industry veteran in Hong Kong talking about the attractiveness of Dah Sing’s offer.
Very few come up for sale and the large banks either have a captive insurance company or already have exclusive partners. Citigroup inked a deal with Hong Kong-headquartered AIA in 2013, Standard Chartered renewed its alliance with Pru last year, while HSBC came to an agreement with Allianz for some of its Asian markets in 2012.
To be sure Zurich Insurance is also considering the sale of its Hong Kong arm, according to people familiar with the sale but deals of this nature tend to be few and far between.
Secondly, Dah Sing is offering both distribution and a manufacturing capability and licence.
While Dah Sing’s insurance manufacturing capability is less valuable than the right to distribute products over its network it has helped them to attract two types of bidders. On the one hand, it attracts those that are already in the market such as AIA and are looking to expand. On the other, it appeals to a plethora of mainland Chinese companies that are looking to enter the insurance market and are keen on the whole package.
The chairman of the China Insurance Regulatory Commission, Xiang Junbo, said on February 13 that the agency is processing nearly 200 applications for insurance licences.
The question becomes what does Dah Sing want? A partner which has experience running an insurance operation efficiently and could increase commissions or does it want to prioritise maximising value from the sale?
China has been acting to stem capital outflows from its more affluent citizens. In February net financial outflows dropped to $41 billion, down from $126 billion in January and $144 billion in December.
Chinese car issuer UnionPay said in February that it was asking merchants to enforce existing rules capping card payments at $5,000 per transaction.
One of the fastest growing insurance segments in Hong Kong was selling products to high net worth mainland Chinese. Policies issued to mainland visitors swelled to new premiums of HK$31.6 billion in 2015, which was 24.2% of total premiums according to Hong Kong’s Office of the Commissioner of Insurance. That is up from $16.9 billion in the first three quarters of 2014.
Hong Kong suspended a capital investment entrant scheme in January 2015 for Chinese nationals entering the Territory but not running a business there. Several insurers offered funds to applicants.
Another risk is that regulators could decide to block an acquisition or drag out an application process. For example, Ageas has so far not received the all-clear on the sale of its Hong Kong business to JD Capital.
Dah Ding has two businesses listed on the Hong Kong stock exchange, Dah Sing Financial Holdings, which houses the group’s life and general insurance business, and Dah Sing Banking Group, which has around 70 branches over Hong Kong, Macau, and China according to its website.
Citigroup is advising Dah Sing on its auction.