Leading insurance groups are gearing up for DBS’s $1 billion-plus auction for the right to sell their products to the Singapore bank's increasingly affluent clients across Asia.
AIA has hired Goldman Sachs, Manulife has engaged JP Morgan, Axa is likely to pick Deutsche Bank and Britain’s Prudential has chosen Bank of America Merrill Lynch to help them win the auction, according to people familiar with the matter.
Bidding will likely kick off later this year, the people said.
DBS is auctioning the right to sell insurance and wealth management products over its network, a type of partnership known in the industry as bancassurance. FinanceAsia magazine first flagged the upcoming auction in its February issue.
The auction could be the last major pan-regional deal for several years as other big players have already found partners. Citigroup inked a deal with Hong Kong-headquartered AIA last year, Standard Chartered renewed its alliance with Pru earlier this year while HSBC came to an agreement with Allianz for some of its Asian markets in 2012 and has no plans to divide its profits in key markets Hong Kong and Singapore.
DBS’s current bancassurance partner, UK-headquartered Aviva, is also fighting to keep its relationship alive. “We are the incumbent and so clearly we're in the box seat,” Mark Wilson, Aviva’s chief executive officer, said on a recent conference call.
Aviva has hired Credit Suisse to help it win the auction, the people familiar with the issue said.
DBS started selling Aviva products to its customers in 2001 and extended the tie-up in 2009 until the end of 2015. The relationship represents 20% of Aviva’s new business in Singapore by value.
“Two years ago we had a very poor relationship. Now I'd say we have an excellent relationship,” Wilson said. Wilson, who became CEO in January 2013 and was previously CEO of AIA is keen to continue investing in Asia.
All the banks and insurers involved declined to comment for this article but people familiar with the matter said DBS had hired Morgan Stanley to conduct the auction.
The shape of the planned sale has not been fixed. DBS could sell the right to distribute products across its entire network or by country, depending on where the bidders see most value or where they have licenses.
Industry sources expect the bank to agree a 15-year long exclusive partnership, based on recent similar deals. Generally, the longer the tie-up the more lucrative it can be for both partners.
The Pru may be at a disadvantage in the bidding because it already has a regional bancassurance tie up with Singapore’s United Overseas Bank and DBS is likely to be concerned about sharing client data with one of its rivals, some of the people said. That said, the UK insurer has demonstrated it can work with multiple distribution partners.
The dating game
It can take years to recruit an army of salespeople to go door-to-door selling products, so insurers are drawn to selling through bank branches because they are able to reach Asia's burgeoning middle class more swiftly.
For banks, meanwhile, such an arrangement can create an additional stream of fees and a handsome upfront payment. At a time when financial resources are scarce these partnerships also need little capital allocation and boost the return on equity.
With insurers and bankers now grappled with how to value the potential business, one senior insurance executive said he was now looking at how much AIA paid Citi per branch.
DBS has over 250 bank branches across Asia -- about 100 branches in Singapore, 54 in Hong Kong, 43 in Taiwan, 39 in Indonesia, 29 in mainland China, and 12 in India.
AIA paid Citi an exclusivity fee of $800 million for 15 years access across 11 Asian markets and 600 branches where it has licenses. Citi chose to account that upfront payment over the life of the partnership. The economic value of the partnership is split 50:50.
Some insurance industry sources said that DBS is unlikely to be able to raise as much as Citi since the US bank's clients are on average richer and as a result can spend more on lifestyle protection.
But others predicted that the interested parties would likely consider differences in the geographical distribution of DBS's branches.
Hong Kong and Singapore, for example, have a greater concentration of wealthier clients and Citi only has 60 branches across both centres.
Another key difference is that DBS does not have branches in South Korea. Korea’s regulator does not allow exclusive bancassurance tie-ups and Citi closed about a third of its 190 branches in the country this year because they weren’t profitable enough.
A growth area for banks
As banks increasingly engage with clients over the internet, prospective buyers are also trying to evaluate the potential for online sales. DBS earlier this year said it would spend S$200 million ($155 million) more on enhancing its digital platform over and above its S600 million annual spend.
"That is actually going to make the difference between the banks that will survive and the banks that will not survive," DBS chief executive Piyush Gupta said recently in a report. One way to do this is look at the number of customers and their engagement with the bank. Citi had 7.4 customers registered for digital banking services in Asia as of April.
In another benchmark, Pru said it paid GBP731 million ($1.2 billion) in fees in installments over three years to Standard Chartered to renew its exclusive deal for another 15 years.
Standard Chartered decided not to hold an auction, partly because of the execution risk of switching insurance providers. The interface between the insurer and the bank is multi-faceted and fraught with compliance issues as the banks store a lot of data on citizen finances.
Any change in insurance provider would also mean a period of disruption which could see DBS lose custom.
Putting a value on bancassurance deals is also tricky. Banks would rather regulators didn't see them taking big upfront payments as it might lessen their perceived commitment to serving citizens, so lump sums are often smoothed out over the life of a partnership, industry sources said.
Much depends on the contractual terms too since they could include bonuses or claw-backs if commission-sharing targets are not met.
One dampener on the DBS deal's potential valuation is that DBS is very concentrated in Singapore and already has a large share of this mature market. As such, industry sources said it would be hard to convince potential suitors that it is a growth story.
That said, insurance in Singapore has traditionally enjoyed fat margins plumped up by a plethora of additional benefits, known in the industry as riders, on basic insurance policies.
Bancassurance relationships can take many forms, ranging from simple commercial agreements, to a joint venture anchored by equity investment and an exclusive distribution agreement, all the way to a fully integrated model in which the bank has a wholly-owned insurance unit.
Sun Life, Canada's third-biggest insurer by assets, teamed up last year with Khazanah Nasional, the Malaysian government's investment arm, to buy 98% of a Malaysian life insurer for $596 million. But the real prize was an exclusive agreement with Malaysian bank CIMB to sell policies at its 312 branches to its 7.8 million customers.
Bancassurance is growing much faster than door-to-door insurance sales in Asia. Reinsurer Swiss Re estimated that a decade ago only about 2% of new life insurance premiums sold in Asia were via banks. By 2012 that number had grown to more than 70% in Taiwan, 50% in Thailand and 40% in Hong Kong.
Relationships between banks and insurers are also getting longer.
MetLife, America's largest life insurer, said last year it was buying stakes in two Malaysian insurers and entering into a 20-year bancassurance relationship with the country's fifth-largest banking group, AmBank, for dollars 249 million.
Are we exclusive?
Bancassurance has not always been very profitable in Asia. Banks and insurers have sometimes sold competing products and regulators have cracked down on miss-selling as well as a lack of protection in the smorgasbord of offerings that act as deposit substitutes.
The mortality protection gap -- the extent to which families are insufficiently covered if the primary breadwinner dies -- is $32 trillion in South and East Asia, far larger than the $7 trillion deficit in Latin America and the $13 trillion gap in Continental Europe.
Besides the stunning wealth creation happening across Asia's emerging economies that makes insurance more affordable to the region's middle class, there are social changes afoot making insurance products necessary to Asian citizens.
An exclusive relationship eliminates the sheer administrative burden of handling different insurance providers. Citi had about 150 different bancassurance agreements with life insurance companies across Asia before focusing on AIA.
Some insurers, regulators and bankers think a small number of insurance providers is optimum. In India, as well as in South Korea, exclusivity is banned.