Sun is out in Hong Kong

Sun Life doubles Hong Kong life insurance business via acquisition of CBA business.

Sun Life has expanded its Hong Kong life insurance business via a $445 million acquisition of CMG Asia from Australia's CBA.

The deal sees Sun Life acquire the number 11th ranked player in Hong Kong. CMG Asia has a 2.4% market share in the life insurance sector among individuals (based on in-force premiums). When that is combined with Sun Life's 2.1% market share that creates a larger entity with a 4.5% market share and which ranks 7th.

That puts the new business just outside the first division in the Hong Kong life sector. The Hong Kong market leader is AIA with a 19.9% market share, followed by fast growing HSBC (9.7%), Prudential of the UK (9.2%), Manulife (8.8%), AXA China (6.6%) and Hang Seng Life (4.9%).

According to industry experts, the Hong Kong life insurance sector saw 20% annual compound growth between 1998 and 2003 and continues to be a growth market. Penetration levels are low with the ratio of premiums over GDP at a mere 5.3%.

This deal gives Sun Life a meaningful pick-up in scale. Both businesses are of a similar size and both use an agency salesforce. Industry experts say that since this is a scale game Sun Life will benefit from cost synergies as it manages a greater asset base with a similar number of people.

CBA has been trying to sell its Hong Kong business since 2002. It inherited the business after its domestic acquisition of Colonial and quickly decided it was non-core. However, its efforts to sell the business via an auction in 2002 proved messy. The process became abortive after a number of the bidders used due diligence to instead try and poach key members of the agency salesforce and when low morale set in among the remaining salesforce.

After abandoning the sale, CBA decided to refocus on building the business. It ratcheted down costs and improved productivity. It also managed to reduce the percentage of guaranteed products from 96% to 59%.

However, the business still did not fit with its overall strategy. Hence Sun Life, advised by Morgan Stanley, was able to persuade CBA to enter discussions. Once bitten, twice shy, CBA was persuaded by Sun Life that it was serious about doing a deal and that in the event that one did not occur that it would respect confidentiality issues. On this basis, the two major financial institutions went into discussions and a deal was announced yesterday.

The deal sees CBA selling its Hong Kong business, and retaining small businesses in Indonesia and Vietnam. The deal was done at an industry standard valuation estimated at 1.2-1.4 times embedded value.

Should Sun Life want to grow any further in Hong Kong it will have to either do so organically or make another acquisition. Other businesses that may or may not one day be for sale include Zurich (market share 1.5%), Mass Mutual (1.9%), Transamerica (2.1%), Pacific Century (2.3%) and ING (2.4%).

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