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The biggest acquisition of a Hong Kong company this year shows that the lure of insurance as a means to access the vast pool of mainland Chinese savings remains undimmed.
Last week a company controlled by one of the city’s oldest business families beat out Canada’s Sun Life Financial Inc. to buy FTLife Insurance Co., a minnow in an insurance market dominated by AIA Group Ltd. and Prudential Plc.
NWS Holdings Ltd., an arm of billionaire Henry Cheng’s New World Development Co., will pay $2.75bn to purchase the company from Beijing-based JD Capital. The Hong Kong conglomerate joins a rush for Hong Kong insurance assets that’s drawn acquirers from Alibaba Group Holding Ltd.’s Jack Ma to Chinese developer Thai Hot Group.
At first glance, the deal looks frothy. Investors certainly appeared to think so, driving New World shares down as much as 4.7 percent last week, the most in more than two years. The price tag is almost double the $1.38 billion JD forked out to buy FTLife from Belgian insurer Ageas three years ago.
But the acquisition has value in light of the limited number of options available to meet voracious Chinese demand for Hong Kong-based offshore policies. Mainland companies have been keen to buy insurance assets in the city, only to be seemingly thwarted by the difficulty of moving money across the border. The banks that owned Hong Kong Life Insurance Ltd. scrapped a $914 million sale to China’s UCF Group Co., a conglomerate led by businessman Zhang Zhenxin, in October after waiting more than a year for the deal to close. And U.S. insurer MetLife Inc has decided to shelve the sale of its Hong Kong business valued at more than $500 million after the short-listed Chinese suitor failed to meet the funding commitment, Reuters reported last month.
NWS is paying 1.4 times book value for FTLife, according to Bloomberg Intelligence analyst Steven Lam. That looks reasonable compared with the 1.9 times book Yunfeng put up for MassMutual Asia or the 5 times multiple that Thai Hot paid for Hong Kong’s life insurance unit of Dah Sing Financial Financial Holdings Ltd. in 2016. Zhang, meanwhile, was to have paid 9 times book for Hong Kong Life.
Cross-border insurance demand has rebounded after Beijing sought to tamp down buying of Hong Kong policies a couple of years ago by banning the use of China UnionPay Co. credit and debit cards to stop multiple swiping and contain capital outflows. In the first nine months of 2018, industry-wide APE rose 10%, after falling 12% in the same period last year, according to Bloomberg Intelligence.
With the threat of further yuan devaluation and the shadow cast by the US-China trade war, the attraction of dollar-based savings and investment instruments is unlikely to recede. Under an idea being discussed as part of China’s Greater Bay Area plan, Hong Kong insurers may eventually be allowed to sell policies on the mainland.
If that comes to pass, $2.75 billion for a foothold in the Hong Kong insurance market might even start to look like a bargain.
—Bloomberg
Faye Flam is a Bloomberg Opinion columnist. She has written for the Economist, the New York Times, the Washington Post, Psychology Today, Science and other publications. She has a degree in geophysics from the California Institute of Technology