MS&AD’s re-entry into China life insurance poses challenge

Japanese firm was the dark horse in race to buy CBA’s stake in a Chinese life insurer. While it celebrates its surprise win, it will do well to remember clinching the deal is just the opening skirmish in a battle to crack the market.

Japan’s MS&AD Insurance is re-entering the world’s third largest life insurance market by teaming up with a Chinese state-owned enterprise. Japan Inc. will be watching the results with interest.

MS&AD Insurance’s unit Mitsui Sumitomo Insurance said on Wednesday it planned to buy a minority stake in the fourth-largest Sino-foreign life insurer, BoComm Life, for Rmb4.325 billion ($668 million) in cash from the Commonwealth Bank of Australia (CBA).

BoComm Life is a unit of state-controlled Bank of Communications, which continues to hold the remaining 62.5% stake in the business and offers a formiddable distribution platform. China's fifth-largest bank will also hold the whip hand in the relationship going forward. 

The transaction is also noteworthy as the latest sign of growing interest from strategic buyers as China opens up its financial institutions for overseas investment. 

CBA has been looking for a buyer for its China business since September, after failing to sell it as part of the A$3.8 billion (over $3 billion) disposal of its life insurance business in Australia and New Zealand to Hong Kong-based AIA, which already has a well-established business in China. 

Industry players expected that the under bidders for the broader CBA insurance sale, such as Zurich Insurance or MetLife, would have a head-start in the auction and wind up as the eventual buyers of CBA’s 37.5% equity interest in BoComm Life.

However, Mitsui Sumitomo Insurance stepped up. The Tokyo-headquartered firm has been buying businesses around the world across recent years in an effort to diversify away from its large and mature domestic P&C business.

"The acquisition will provide MSI access to the Chinese insurance market which has high growth potential and association with a well-known brand name of Bank of Communications," said Soichiro Makimoto, a senior analyst at credit ratings agency Moody’s. 

Key to clinching the deal was solving a problem of funding a Rmb3 billion capital hike at BoComm Life.

China’s insurance regulator -- China Insurance Regulatory Commission (CIRC) -- wanted to secure the capital for the business ahead of any transfer of ownership, according to a person familiar with the matter. CBA was not keen on putting any more capital into the business.

Enter Mitsui Sumitomo Insurance which said that once CBA had ploughed the capital into the business the Japanese company would swiftly repay CBA. This dovetailed with Mitsui Sumitomo Insurance’s own plan to grow the business in partnership with Bank of Communications, the person said. 

The Japanese insurer also paid up for BoComm Life at about 4.5 times book, another person familiar with the matter said.

Of course, Mitsui Sumitomo Life had to prove itself a credible buyer to the nervous seller and Chinese authorities. A long track record in China was crucial. It opened a representative office in Shanghai in 1993, established a wholly-owned casualty insurance business in the country in 2009 as well as forging an alliance with China Pacific Insurance (Group).

Mitsui Sumitomo Life was named preferred bidder for the business around Chinese New Year.

The next hurdle will be securing the Chinese regulators’ approval for the transaction. Both parties to the deal have sounded out the regulator and the paperwork should be placed on the right people’s desks promptly.

One snag may be that the approval process drags out, a great source of angst to CBA which needs the deal to close so that it in turn can finalise the sale of its local insurance business to AIA. CIRC is in the process of merging with the China Banking Regulatory Commission to form the China Banking Insurance Regulatory Commission which may cause some delays.

Then of course, Mitsui Sumitomo Insurance faces regulatory risk as the Chinese insurance market is in upheaval while the government looks to reduce financial risk in the system. Anbang's demise is the most dramatic result of this clean-up. 

BoComm Life was one of three insurance companies rapped by the industry watchdog in November for shoddy policies and banned from issuing new policies for the following six months. 


Another challenge is making its relationship work with its majority partner in the venture.

Mitsui Sumitomo Insurance will have bitter experience to draw upon in this regard. It said it would sell its 2.09% stake in Sinatay Life Insurance in 2016 after falling out with the firm over strategy and risk tolerance. It first invested in Sinatay in 2010.

As part of the deal with Bank of Communications, Mitsui Sumitomo Insurance will be able to sell insurance products via Bank of Communications’ 3,270 branches, a so-called bancassurance tie-up.

The importance of bancassurance as a distribution channel is rising across Asia. In China, the ratio of revenue through bancassurance to overall premiums sold in China grew to 36.7% in 2013 to 44.1% in 2016 according to Mitsui Sumitomo Insurance. 

However, the relationship with is not exclusive. Bank of Communications can sell other insurance products through its network.

Insurance company executives said the top three challenges that their companies face in the bancassurance channel across Asia were regulations, competition, and lack of awareness, according to a survey published in March by industry consultancts Limra.

Limra also noted that bankers sell their core products quickly and easily. By comparison, banks often see insurance with underwriting requirements and the potential for loading and rejection as time consuming and troublesome so they frequently do not bother pursuing those product sales.

Door-to-door salesmen, known as insurance agents in the industry are still the major distribution channel in Asia where retirement products are a tough sell in cultures where children are expected to support their parents in old age.

Founded in 2000, unlisted BoCommLife has 1,529 staff. In 2010 BoComm became the first bank cleared by the regulator to own an insurance company and bought China Life Insurance Group’s stake in the business.

It’s net income grew to Rmb256 million in the year ended December, 2017, up from 204 million a year earlier.

Nomura advised MSI on the transaction, Citi advised CBA.

This article has been updated to include a comment from Moody's

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