A Hong Kong life insurer that didn't make the city's top 20 by premiums in 2014 seems an unlikely target of a bidding battle. The fight that at one point drew 30 interested parties owed everything to the allure of a bridge to China.
Dah Sing Financial Holdings agreed to sell its life-insurance operations in the city to China's Thai Hot Group for about $1.4 billion, five months after saying it was exploring options for the business. At least four other Chinese companies were vying for the unit in the final round of bidding.
That price looks frothy as a standalone financial investment, equivalent to more than 2.9 times the unit's embedded value and seven times book value. By comparison, billionaire Richard Li paid 1.7 times embedded value for ING's Hong Kong insurance business three years ago, while Chinese investment firm JD Capital -- one of the bidders for Dah Sing's life unit -- picked up the local life-insurance unit of Belgium's Ageas for a 1.4 multiple last year (or 1.3 times book value).
The Ageas unit, moreover, is almost double the size of Dah Sing Life: HK$927 million ($119 million) in new premiums last year, versus HK$494 million, according to Bloomberg Intelligence analyst Steven Lam.
Strategic value helps to explain the difference. Dah Sing Life holds promise because it can reach the enormous pool of mainland Chinese savers who increasingly want policies denominated in hard currencies as the yuan weakens. The deal includes an agreement that allows the business to continue selling products through Dah Sing Banking Group and Banco Comercial de Macau for 15 years.
China has been trying without success to clamp down on this flourishing business in Hong Kong. The nation's insurer regulator capped payments through the UnionPay credit- and debit-card network at $5,000 per transaction, and barred buying by third parties. Yet purchases of insurance policies by mainland visitors to Hong Kong jumped 94 percent in the first quarter.
It's notable that mainland entities were among those seeking to capitalize on the trend. In addition to Thai Hot, an investment holding firm that in March bought Nasdaq-listed radiology firm Alliance Healthcare and owns Shenzhen-traded real estate developer Thai Hot Group, the bidders included property company Country Garden, JD Capital and China Life, the country's biggest insurer.
Thai Hot is taking a path increasingly followed by China's real estate companies. A growing insurance business can help to cushion the volatility of a patchy property market revival at home, as well as providing access to an asset sought by wealthy clients. Like Country Garden, Thai Hot might have had another motive. Many developers are grappling with stretched balance sheets. An insurance business is not only a source of financing but also, as Daiwa analyst Leon Qi puts it, a "tool for U.S. dollar finance."
Insurers outside China have been targeted by fast-growing private firms such as Fosun and Anbang -- which this week dropped a $1.57 billion bid for Fidelity & Guaranty Life -- as a source of cheap funding for other acquisitions.
JD Capital, meanwhile, planned to combine Dah Sing Life with the Ageas unit it bought last year. For state-owned China Life, hurt by falling investment returns in the first quarter, the purchase would have had a similar logic, giving the company wider access to Chinese savers seeking dollar assets (policies in the Hong Kong currency qualify, because of the city's peg to the greenback.)
Those contenders will now have to look elsewhere. As long as the yuan continues to weaken and Chinese savers seek to move money offshore, assets such as Dah Sing's insurance business will continue to be in demand.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Based on annual premium figures for total in-force business on the website of Hong Kong's Office of the Commissioner of Insurance.
Embedded value combines net asset value with the present value of projected profits from policies and is used to value insurers.
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