Nissay’s M&A splurge to regain No. 1 spot

Nippon Life Insurance is dipping into its warchest to purchase an 80% stake in NAB's life insurance business.

Nippon Life Insurance is buying an 80% stake in National Australia Bank’s life insurance business for A$2.4 billion ($1.7 billion), the latest in a string of acquisitions designed to regain its number one spot in the Japanese market as measured by annualised new premiums.

NAB said on Wednesday that as part of its partnership with the Japanese unlisted mutual company it will enter a 20-year distribution agreement to provide life insurance products through its distribution networks. 

The sale price for the business and an upfront payment for the bancassurance partnership represents a 2015 implied PE of 19 times for the 80% stake based on pro forma earnings of approximately $160 million. On an embedded value basis the acquisition was about 1.1 times.  

The deal was complex in terms of structuring and regulatory oversight as it involved the carve out of standalone life insurance business including a new technology platform. Morgan Stanley advised Nippon Life. 

Nippon Life, also known as Nissay, said in its medium-term plan on March 20 that it had earmarked ¥1 to ¥1.5 trillion for M&A including overseas expansion to help it regain the No.1 position for annualized new premiums from rival Dai-ichi Life. This marked a departure from the previous plan, which focused on turning around domestic earnings.

The purchase of a majority stake in NAB's life insurance business called MLC Life marks Nippon Life's largest acquisition overseas according to data tracker Dealogic and its first foreign majority purchase. 

Nippon Life is not alone as it hunts for deals. Other Japanese life insurers are looking to boost growth; tackle a mismatch between asset and liability duration as ultra-long contract periods lengthen the duration of liabilities; and manage a lack of alternative investment assets and a bias toward equities, or foreign bonds with high forex risk in the low-interest-rate environment.

Australia is an attractive market for life insurers, as average incomes are higher than in emerging markets and insurance premiums are expanding through the superannuation system.

One person familiar with Nippon Life's product range said their policies are likely to be attractive to Australia's 23 million population as they are designed for an aging population focused on retirement products. 

Nippon Life, which is still Japan’s No. 1 life insurer by policies in force, is in the process of buying an 85% stake in unlisted Mitsui Life Insurance, ranked 15th in the life insurer ranking in Japan on a premium income basis for about $2.5 billion.

The Japanese insurer is also in talks to raise its stake in India's Reliance Life Insurance to 49% following a change in regulation raising the cap on foreign ownership in April, according to a person familiar with the matter. This would mark the second transaction with the Ambani family-controlled group this year. Nippon Life has raised its ownership in Reliance Capital Asset Management to 49% from 35% for ¥22 billion. 

In Indonesia it bought a 20% stake in Indonesia's PT Asuransi Jiwa Sequis Life last year for $425 million. 

Credit analysts worry that this acquisition binge entails some execution risk for Nippon Life which has less experience integrating and managing foreign businesses compared with some of Japan’s property & casualty insurers.

"Operational integration risk, and successful management and governance of MLC Life will be crucial for Nippon Life to maximise the benefits from the acquisition," said Akane Nishizaki, a credit analyst at Fitch. 

Risk appetite

Nippon Life remains relatively cautious about both domestic and overseas acquisitions. Credit rating agency Moody’s estimated ahead of the announcement that at ¥250 billion (A$2.9 billion), the purchase of a stake in NAB's life insurance business would be less than 3% of its adjusted shareholders’ equity.

Risks would be limited as the vast majority of policies sold by NAB’s insurance unit combine insurance and investment and transfer most of the risk to the policyholder. Also most of the policies sold by NAB’s insurance unit do not have any guaranteed returns.

To be sure, NAB’s insurance unit does sell both retail and group risk insurance products, for which it bears the risk, but these make up only a small percentage of its policies.

NAB capital boost

For NAB, the sale deal would release additional common equity Tier 1 capital at a time when Australian banks are accumulating capital to cover more onerous regulatory requirements.

“This would be a great outcome given the poor profitability of life insurance and the massive regulatory capital release,” said CLSA analyst Brian Johnson in a report.

The life insurance operations are relatively capital intensive and have low return. NAB estimated CET1 capital would increase by 50bp.

Ashurst and Nishimura & Asahi advised Nippon Life while Herbert Smith Freehills advised NAB. 

The deal is expected to close between September and December 2016. 

This article was updated to include more details of the transaction. 



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