Finance

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

The much-lauded, and occasionally derided, mainland Chinese shoppers that helped boost Hong Kong's economy in recent years may have melted away, but there is one item they're still crazy for -- insurance.

Late Uptick
The Hong Kong lender's shares surged Wednesday
Source: Bloomberg

At least that's what Dah Sing Financial, a family-run banking group that traces its roots back to 1947, appears to be counting on as it prepares to dispose of its insurance unit for a sum thought to be north of $1 billion. It may well be worth more than that, but not because of the business per se.

Dah Sing Life Assurance is tiny. According to data from Hong Kong’s Office of Commissioner of Insurance, the lion's share of life insurance policies sold in the city are from either HSBC, AIA, Prudential or the Hong Kong unit of Bank of China. Dah Sing Life shares the remaining 9.2 percent of the market with a multitude of other similarly small players. Dah Sing Financial's latest annual report lists 2014 pre-tax income from insurance at just HK$252.4 million ($32.5 million).

An about $1 billion price tag would put Dah Sing Life at around two times its embedded value. (Embedded value measures an insurer's future profits from its current policies, assuming they run to expiration.) That's well over the about one times historical embedded value that Chinese life insurance companies typically trade at and higher even than the 1.7 times AIA, Asia's biggest insurer, clocks in at.

Small Share
Contribution of insurance to Dah Sing Financial's pre-tax income
Source: Bloomberg

And although any sale will probably come with a more difficult to value contract that would allow the buyer to continue selling policies via Dah Sing's banking unit, that two times is also more than the around 1.7 times embedded value billionaire Richard Li forked out for ING's business in Hong Kong three years ago. It also compares with the about 1.4 times that China's JD Capital paid Ageas for its insurance unit in the city last year.

The other big appeal of Dah Sing Life is its very location. While shoppers from the mainland are deserting Hong Kong's luxury handbag and jewelry stores in droves and instead plumping for Japan or Europe, where their battered yuan stretches further, they're still buying from the city's insurers in a big way.

Mainland visitors accounted for 21.7 percent, or about $2.7 billion, of insurance premiums sold in Hong Kong in the first nine months of 2015, data from Office of Commissioner of Insurance show. Although the rate of sales has slowed in recent months, no doubt due to China's equity rout (people have to be physically present in the city to sign a contract), a comparison with the situation five short years ago is telling:

Steady Growth
Premiums sold by life insurers in Hong Kong
Source: Office of Commissioner of Insurance
* Figure is for the first nine months of 2015

Mainland Chinese come to Hong Kong for their life insurance policies primarily because they're cheaper, according to Daiwa Capital Markets analyst Leon Qi. Risk premiums are lower, reflecting the city's better medical technology and healthcare facilities, and its population's longer life expectancy.

There's also an element of capital conservation as the yuan depreciates. Some 91 percent of policies in Hong Kong are denominated in Hong Kong or U.S. dollars, to which the Hong Kong currency is pegged. Because of that peg, Hong Kong also has to mirror any increases in U.S. borrowing costs, which makes for rising returns as the interest-rate cycle turns up.

With all that in Dah Sing Life's favor, its parent might even hope for more than the $1 billion figure being kicked around. Dah Sing Financial's stock surged Wednesday, rallying as much as 12.1 percent and closing 9.1 percent higher. Clearly its shareholders have already got the message.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net