Dah Sing Financial Group’s sale of its insurance arm to Chinese conglomerate Fujian Thai Hot Investment for HK$10.6 billion ($1.4 billion) after a fiercely contested auction illustrates just how keen mainland firms are for overseas assets.
Dah Sing said in a statement it would sell its Hong Kong and Macau insurance sales and underwriting business to Thai Hot for HK$8 billion. Thai Hot is paying an additional HK$2.6 billion in cash to Dah Sing Banking for a 15-year exclusive bancassurance tie-up.
Thai Hot, a property-to-insurance group, is paying 2.9 times embedded value for the insurance operations, and just under seven times book. In comparison, JD Capital has just completed the purchase of the Hong Kong life insurance business of Belgian insurer Ageas for $1.4 billion at just under 1.3 times end-2014 embedded value and 1.4 times book.
Thai Hot beat other Chinese suitors such as Beijing-headquartered JD Capital, which bid around $1.1 billion, and Guangdong-based property developer Country Garden as well as regional insurers such as AIA, people familiar with the process said on condition of anonymity.
Chinese companies are especially keen to buy overseas insurance companies and gain access to foreign currency at a time when capital outflows are coming under tighter control as the government struggles to limit the depreciation of the renminbi against the dollar.
The impetus to look abroad comes as the earnings of investment management firms and insurers in China are squeezed due to weaker economic conditions and falling interest rates. With the renminbi expected to continue to depreciate the onus is on these companies to try to deploy capital overseas quickly.
Property firms are also targeting insurance companies as China makes it easier for insurers to put money to work in alternative investments, such as real estate. Such firms are also trying to diversify and capture more revenue from China’s burgeoning middle class. Evergrande Real Estate, for example, agreed last year to buy Chinese insurer Great Eastern Life Assurance.
While Hong Kong is a relatively mature and competitive market, one segment is growing fast: 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 HK$16.9 billion in the first three quarters of 2014.
The mainland companies bidding for Dah Sing’s insurance arm were keen to profit from this trend.
Sales are still brisk according to industry participants despite 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.
Chinese card issuer UnionPay said in February that it was asking merchants to enforce rules capping card payments at $5,000 per transaction.
“The clampdown is designed to capture the more egregious cases of mainlanders shifting money offshore, not the average man-on-the-street looking to buy a better quality policy to protect his family’s lifestyle,” said the first person familiar with the matter.
Dah Sing said on January 12 that it was 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 auction attracted initial interest from over 30 companies mainly from mainland China, according to a one of the people familiar with the matter.
The relatively high valuation also reflects the scarcity in Asia of bancassurance distribution deals that enable insurance policies to be sold over bank networks.
"There is a battle for distribution going on," said a second person.
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.
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 Germany's Allianz for some of its Asian markets in 2012.
Citigroup and Linklaters advised Dah Sing on the sale. Davis Polk advised Tai Hot. The deal is expected to close in the fourth quarter of this year.