Zurich Insurance sells out of New China Life

Half of the $943 million block trade is taken up by Swiss Re, giving it a 9.4% stake in the company at a time when analysts say the Chinese life insurance sector is undergoing a positive re-rating.

Zurich Insurance Group has sold its remaining 9.4% stake in New China Life Insurance, taking advantage of the sharp spike in the share price in the past five days after China flagged a set of economic reforms that is seen as beneficial to the domestic insurance sector.

The deal, launched and completed after the Hong Kong market closed on Wednesday, raised HK$7.31 billion ($943 million), but 52.3% of that was taken up by Swiss Re. The Swiss re-insurance specialist had agreed to buy the shares directly from Zurich Insurance ahead of the launch and acted as an anchor for the placement, effectively reducing the number of shares available to other investors.

Zurich Insurance has been widely expected to sell the rest of its Hong Kong-listed New China Life shares after the end of a three-month lock-up period in late October, and the fact that the deal turned out to be only half the anticipated size resulted in a bit of a scramble among investors who were keen to get shares.

“There isn’t much stock to go around and everybody is chasing,” one banker close to the deal said shortly after launch.

According to sources, the transaction ended up being multiple times covered with orders from more than 150 investors in Asia, Europe and the US.

As the deal was launched at a fixed price to match the price agreed to by Swiss Re, the rush for shares did not have an impact on the amount of money raised. But thanks to the 21.5% gain in New China Life’s share price since last Wednesday, Zurich International was able to pocket an additional HK$2.50 per share before expenses compared to its previous sale in July.

The deal was completed at a price of HK$25 per share, which translated into a discount of 7.7% versus Wednesday’s close in Hong Kong. This is slightly wider than the 6.4% discount that the seller was able to achieve in July, but since the current deal is more than three times the size and comes on the back of a sharp rise in the share price, it is by no means excessive.

Despite a market cap of close to $12 billion, New China Life is also a pretty illiquid stock. Based on the average daily trading volume in the past month, the placement (including the Swiss Re portion) accounts for about 90 days of trading, which gives further justification to the discount.

The transaction comprised 292.5 million H-shares, which account for 28.3% of New China Life’s Hong Kong-listed share capital and 9.4% of the company as a whole. The Chinese insurer also has A-shares listed in Shanghai.

Swiss Re is buying approximately 152.8 million shares, which equals an investment of $493 million and will give it a 4.9% stake in the company.

In an announcement issued late last night, Swiss Re said the acquisition reaffirms its commitment to high growth markets. “China is the fifth largest life insurance market in the world, but its penetration is still relatively low. Investing in New China Life enables us to tap into this growth potential,” said John Dacey, Swiss Re’s group chief strategy officer.

The fact that New China Life has been able to sign up another strategic investor of equivalent calibre to Zurich Insurance is a definite sign of approval for the Chinese insurer, which ranks as the third largest life insurer in China based on gross premiums. And it should act as a confidence booster for other international investors long-term.

The term sheets that went out to investors when the deal launched at about 6pm Hong Kong time didn’t identify Swiss Re by name, but investors were told that a strategic investor out of Europe would buy 52.3% of the deal. The name was disclosed later in the evening once the deal was completed, however.

Even without knowing the exact identity of the new strategic investor, there was plenty of interest in the deal. Sources estimated that a bit more than half of the demand came from hedge fund investors, which is not strange given how hot the Chinese insurance sector is at the moment and considering that analysts are saying that the stock, as well as the rest of China’s life insurance sector, is undergoing a significant re-rating.

But overall, the order book included a good mix of global long-only accounts and hedge funds, they said. Asian and European investors had just one-and-a-half hours to submit their orders, while the books were kept open for US investors until 9pm.

Zurich Insurance said the sale reflects its “desire to manage its financial exposure to a large single holding of shares.” In other words, it likely wanted to avoid having to set aside additional capital for having a large investment in a financial sector company, as required by the Basel III regulations.

The company said it plans to reinvest the proceeds of the sale into investments in Asia, which will allow it to “maintain its exposure to Asian markets in a balanced way, benefiting from diversification of its equity portfolio.”

It added that it views China as a major insurance market with significant growth potential. However, in May this year Zurich Insurance received approval from China’s insurance regulator, CIRC, to upgrade its Beijing branch to a wholly owned subsidiary and the intention is to expand its China business through this new subsidiary.

Zurich Insurance first invested in New China Life in 2000. It sold $1.9 billion worth of shares in connection with the company’s IPO in Hong Kong and Shanghai in December 2011, and had been widely expected to further reduce its holdings, or exit altogether, after the initial IPO lock-up expired in December 2012.

New China Life’s share price was trading above the IPO price of HK$28.50 early this year, but there may have been few windows for Zurich Insurance to take advantage of that due to an earnings-related blackout. Instead, it made its first sale in July this year, raising $283 million by offloading about a quarter of its holdings through a club-style deal to a small group of investors. Sources estimated at the time that the shares went to no more than five or six accounts, including one sovereign wealth fund and one quasi-strategic buyer.

The July deal was priced at HK$22.50 per share, which as noted represented a 6.4% discount to the market price at the time. Since then, New China Life’s share price has been hovering in a range between HK$20 and HK$24. The spike in the past five days has marked a decisive break-out from that range and Wednesday’s 0.7% gain saw the stock close above HK$27 for the first time since the end of May.

Including the Swiss Re portion, this is the largest block trade in Asia ex-Japan since Bank of America Merrill Lynch sold its remaining stake in China Construction Bank in early September, raising $1.47 billion.

Goldman Sachs, HSBC and UBS were joint active bookrunners and underwriters for Wednesday’s placement. In addition to those, sources said Zurich Insurance also invited four other banks – CICC, Citi, JP Morgan and Morgan Stanley – to be passive bookrunners, meaning they were not taking orders but will get league table credit for the deal.

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